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Where is the peak in North America?

Burba Hotel Network (BHN) recently connected with hotel investment leaders from across the Americas to gauge their investment sentiments as the New Year approaches. They were asked about broader economic trends, the volume of hotel investment opportunities, the current stage of the hotel investment cycle and availability of capital for new hotel construction. Here is what they had to say.

Mixed messages in the U.S.

The theme for ALIS 2016 is “Where is the Peak?” because this has seemingly been the most common question posed in 2015 from the stage or in the hallways at gatherings of the investment community in the U.S. “We are optimistic. The last cycle lasted roughly 65 months, which is the length of the current cycle. However, two cycles ago, it lasted about 115 months and the fundamentals clearly resemble that cycle,” says Richard Smith, president & CEO of FelCor Lodging Trust, Irving, Texas, when asked about the industry’s current state. “So, we think there is significantly more time remaining in the current cycle.”

Turning to the volume of hotel investment opportunities in the U.S. for 2016 compared to 2015, the majority of respondents were not confident that volumes would be higher in 2016. “With continued market volatility among hotel REITs, we expect liquidity for hotels to cycle back and forth between hot and warm,” says Robert Stiles, principal and managing director of RobertDouglas, San Francisco. “This volatility will create continued buying opportunities for private equity investors able to access attractive floating rate, transitional debt.”

With hotel market performance strong and a lot of capital chasing deals, it’s no surprise that development is picking up. When compared to 2015, executives believe that the money provided for new construction in 2016 will increase (or at least stay the same). “We believe the fundamentals of the lodging sector remain strong and the resiliency of income streams and operating model of premium branded select-service and extended-stay hotels in the upscale segment continue to provide a valuable mitigant against unknown shocks,” says Mitesh Shah, senior managing principal and CEO of Noble Investment Group, Atlanta.

Similarly, respondents believe Canada is in the late stages of its upturn with an economy still expected to trend up in 2016 and more new construction capital becoming available.

“With 2015 Canadian hotel transaction volume forecast to surpass US$2.2 billion, it will be a record year excluding the M&A activity that occurred almost a decade ago,” says Bill Stone, executive vice president of CBRE Hotels, Toronto. “We anticipate a slight decline in transaction volume and the number of trades in 2016, largely a function of an ongoing slowdown in oil and gas dependent markets in Western Canada. It is expected that Canada’s major urban centers, particularly Toronto and Vancouver, will continue to account for the majority of activity but with fewer transactions.”

Show the Caribbean the money

 The 2016 outlook for the Caribbean is nothing but positive when compared to 2015, according to the experts. However, the common phrase ‘show me the money’ is still applicable. The result of this, of course, will likely keep supply growth in check.

“Financiers are more confident than they have been for many years,” says Gary Brough, managing director of KPMG, Turks & Caicos. “Liquidity is also high. However, this has yet to translate into readily available capital. The market is telling us something. However, I do anticipate 2016 to be more active than 2015 partly because the comparative figures are low, but also because the regional investment climate continues to improve.”

Mexico, Central America rise

 While the U.S. seems to be in the late stage of its hotel investment cycle upturn, both Mexico and Central America appear to fall into the early upturn stage.

Emphasizing the strong global demand for Mexico, John McCarthy, owner of Leisure Partners S.A., says, “For the first quarter of 2015, the U.S. continues to represent the highest number of inbound travelers to Mexico at 57.2%. This data confirms the substantial strength of the U.S. economy, but also a dramatic change for the good with regards to perception. Canada comes in as a distant second, with 18.3% of the total, a growth of 3.1%.”

With travel being up, this has led to good hotel performance and increased investor interest. “Investment growth in Mexico should continue to be robust, driven by the need for domestic REITs and other growing institutional players to deploy capital, as well as the divestment requirements of certain RE Investment Funds,” says Clay Dickinson, managing director of Latin America – advisory and asset management with JLL, Miami.

Looking to Central America, Dickinson says JLL is somewhat confident that investment opportunities will be greater in 2016 than in 2015, but for different reasons than the rest. “Panama’s opportunities will likely be driven by the distress of continued oversupply, while commercially oriented hotels in the rest of Central America will be led by industry participants seeking to rationalize their portfolios in accordance with fund investment criterion, consolidation of local players, and/or the exit of certain U.S. investors,” he says. “Investments in Costa Rica’s tourism sector will likely increase, which is consistent with increased demand from North American tourists.”

South America’s mixed bag

 The outlook in Brazil continues to be quite wobbly, while a mixed outlook is seen over the rest of South America with the continent’s economy expected to trend downward. There is a lack of confidence about a greater volume of hotel investment opportunities and a decrease in capital provided for new construction. However, there are some bright spots.

“Hotel development in South America is becoming more challenging, and due to the shortage and high prices of land we see a more intense competition from global and local brands,” says Francisco Levine, CEO of Atton Hoteles, Santiago, Chile. “Exchange rates may favor foreign investment, but also compress medium-term returns. Nevertheless, selected cities in South America offer interesting opportunities as the momentum in the expansion cycle varies significantly.”

Dickinson adds that while Colombia and Chile are expected to witness flat to decreased investment volumes, Peru should see a pick-up. Potentially, Argentina may pleasantly surprise everyone after the elections since hotel demand and investment have been depressed for the past five years.

 

 


 

Contributed by Burba Hotel Network

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