Danielle Douglas
Monday, November 22, 2010

A flurry of recent hotel sales underscores improvement in the hospitality sector, where higher occupancies and rising room rates have drawn local real estate firms from the sidelines in a manner not seen since before the crash of the market.

Acquisitions of hotel properties nationally topped $2.7 billion in the third quarter, almost four times the sales volume for the same period a year ago, according to real estate research firm Real Capital Analytics. The $1.2 billion in deals in September alone made it the most active month since April 2008. Leading the charge in this buying frenzy are a number of homegrown companies, all based in Bethesda, including Host Hotels & Resorts, LaSalle Investment Management, DiamondRock Hospitality, Pebblebrook Hotel Trust and Chesapeake Lodging Trust.

In one of the largest, and most talked about, deals this year, Host Hotels snagged the W Union Square in Manhattan for $185 million, or $686,049 a room, in September. LaSalle Investment has completed five acquisitions in the past two months, during which time Pebblebrook tucked three lodging properties into its portfolio.

"This is an excellent time to be in the market," said Raymond D. Martz, chief financial officer of Pebblebrook Hotel Trust. "It's the beginning of the cycle. And we continue to see a great number of high-quality acquisition opportunities in core markets."

Pebblebrook has two more properties under contract in Los Angeles and Philadelphia for $190 million in total. Former LaSalle Hotel chief executive Jon Bortz formed the company last December to take advantage of turmoil in the lodging market.

At the time, the sector was closing out one of its worst years, with occupancy down 8.8 percent and room revenue down 16.7 percent year over year, according to Smith Travel Research. Tepid demand made it tough for some to repay loans and helped create $31 billion worth of distressed hotels in 2009. Buyers began circling with hopes of snagging properties for cents on the dollar. Owners, however, held out for better pricing.

Improving fundamentals -- with occupancy up 5.2 percent and room revenue up 4.5 percent for the first nine months of the year -- have helped narrow the difference between offers and what buyers would accept, pushing up prices. That activity is likely to continue, with Colliers PKF Hospitality Research forecasting a 36 percent gain in room revenue over the next four years.

The hotel companies "are counting on that [growth] because they are buying at relatively low capitalization rates, but banking on the fact that the industry is going to be improving," said Bob Eaton, executive managing director of Colliers International Hotels.

Though distressed sales accounted for a mere 16 percent of hotel deals in the third quarter, investors are confident that number will grow. And with good reason. About $9.6 billion in hotel commercial mortgage-backed securities were delinquent at the start of this month, while $14.4 billion in hotel debt is set to mature between now and 2014, according to the Trepp research service.

"That's a big driver of transaction activity," said James L. Francis, president and chief executive of Chesapeake Lodging. Chesapeake, which was established in January, has several deals coming down the pike that are driven by debt maturities in 2011, he said.

"We're at the beginning of what we expect will be a long growth period for the hotel industry," said Bruce Stemerman, managing director of Jones Lang LaSalle Hotels in the District. "People are going to enjoy increased demand in major urban markets, without considerable increased new supply. That's a good equation for improved operating results for owners."

Not to mention a strong attraction for buyers.

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