As high-end U.S. hotels come to market, foreign investors stand at the ready

Investor appetite for luxury hotels in the U.S. has always been high. In gateway markets, where barriers to entry remain relatively high, acquiring high-end hotel assets is the quickest most efficient way for an investment group to get into a city. Not long ago, when a large, high-end asset came to market, there were a handful of foreign buyers, particularly Middle Eastern sovereign wealth funds. The other set—the majority—were U.S.-based private equity shops and real estate investment trusts, the Blackstones and Strategics of the world.

Now, there are fresh, new buyers—spurred by the long-term growth and cash-flowing prospects hotels can bring in, the need to diversify portfolios and hedge against oftentimes volatile domestic economies, like what is currently the case in countries such as China.

So when an asset meeting this criteria comes to markets, Asian, Middle Eastern, European and, yes, U.S. buyers, all consider how a buy will help their cause.

So when news broke that the Mandarin Oriental in Boston was up for sale, ears perked. And like all luxury properties hitting the market nowadays, it's going to cost a pretty penny to acquire.

Word is when the Irish government auctions the hotel off in a bankruptcy proceeding later this fall, it could fetch more than $148 million, which would put the seven-year-old property on Boylston Street in the Back Bay at $1 million per key.

If the hotel does sell for that much, it would be a city-wide record. The Boston Globe spoke to Jack Levy, SVP for finance at Pyramid Hotel Group, a Boston-based hotel operator and investor, which has a portfolio of hotels within the city. The company knows the market as well as anyone.

Echoing the current state of hotel investment, Levy remarked that many different investors, from different locations, will be looking hard at the asset.

“There are a lot of investors chasing high-end urban hotels,” Levy told The Globe. “And be they private equity [real estate investment trusts] or foreign investors, they’re all very interested in Boston.”

The hotel is for sale because of the bankruptcy of Anglo Irish Bank Corp., which owns a controlling share of the property. While insolvency is never optimal, selling hotels in the current market is—as both interest rates and supply remain muted, while average daily rates climb. (The average room rate in central Boston and Cambridge is up 7 percent this year, according to the Boston hotel consulting firm Pinnacle Advisory Group, and is projected to climb 8 percent next year.) It's a nice mix, especially for foreign buyers, who see the U.S. as a sure, safe bet for now and the future.

According to CBRE, sales of hotel properties nationwide surged 47 percent in the second quarter, compared to a year earlier.

Brokerage firm JLL is marketing the hotel, while Cushman & Wakefield is selling the building’s retail space separately. Condominiums in the 14-story building are not part of the bankruptcy proceedings.

Initial bids on the hotel portion are due in late November and a sale scheduled for court approval in January.

The tide of hotel sales in Boston has not ebbed as yet, and the price tags are soaring. As The Globe notes, last year, an arm of the investment bank Morgan Stanley bought out Blackstone Group's interest in the Boston Harbor Hotel as part of a larger deal that valued the hotel at nearly $724,000 a room. Also last year, a Maryland group bought the Revere Hotel and a neighboring garage on Stuart Street for about $731,000 a room.

While Boston is a top MSA, it still isn't New York, Miami or San Francisco, the types of cities that investors covet the most. You don't have to go further than the recent sales of the Waldorf Astoria and Baccarat Hotel, in New York, as evidence. Both hotels sold for well over $1 million per key.

But for comparison, the more recent sale of The New York Palace to Korea's Lotte Group was a sale that didn't reach $1 million per room. The $805-million sale, however, came close.

What it shows is that as hotel prices continue to in their frothy state, the frothiness is spilling over to markets that, before, didn't have the pricing power. The question is: Is it sustainable? Are prices being bid up based on underlying fundamentals or is it foreign conglomerates paying prices at an exceedingly high level. Foreign buyers tend to have a longer hold strategy than U.S. investors, so paying more now may not matter for them if they intend on holding onto the asset for more than 10 years.

What it absolutely does is introduce new and fierce competition for investors who, before, didn't have to contend with these large, powerful groups. How it will all play out as the years mount should be dramatic.

 


External Source : Boston Globe