Construction costs seen keeping hotel prices high
Soaring U.S. construction costs, as well as high land prices and favorable financing, are likely to keep prices for hotels strong for at least the next few years, hotel owners said on Tuesday.
“An inflationary environment for construction costs is good news for companies like ourselves,” Bob Alter, president and chief executive officer of real estate investment trust Sunstone Hotel Investors Inc. (SHO.N: Quote, Profile, Research), said at a lodging industry conference.
Costs of raw materials and labor have been rising in the wake of hurricane damage in New Orleans and the U.S. Gulf Coast. In addition, burgeoning demand from countries like India and China has driven prices higher.
“In Los Angeles, the price has gone from $60,000 a room to $100,000 — if you can find a site,” said Jonathan Gray, senior managing director at Blackstone Real Estate Advisors.
Companies like Blackstone, which expects to close this week a $3.4 billion acquisition of hotel company La Quinta Corp. (LQI.N: Quote, Profile, Research), have been buying up hotels from brand operators like Hilton Hotels Corp. (HLT.N: Quote, Profile, Research) that are seeking to move out of real estate while asset prices are strong.
“For us, new build is not our thing. It will never be a core feature of what we do.” Gray said.
Christopher Nassetta, chief executive of Host Marriott Corp. (HMT.N: Quote, Profile, Research), said some recently-announced hotel development deals — he specified projects in Las Vegas — are likely to be canceled after developers gather actual bids from contractors.
“That’s good news if you are sitting on a big pile of assets,” he said.
Low long-term interest rates and rising real estate prices are also underpinning prices for hotel assets.
“Land costs have doubled in the last three years,” said Thomas Hutchison, CEO at CNL Hotels & Resorts Inc.
But even if real estate prices start a downward cycle, the hotel owners said basic changes in the industry have provided something of a cushion.
“The capital markets have exploded in terms of size and willingness to take on risk … it puts an underlying floor on value,” Gray said.
The availability of low-rate fixed financing coupled with tighter loan spreads has changed the sector.
“I think we have had a secular shift in valuation — the cost of capital has gone down so the pricing of assets is higher,” Nassetta said.
He estimated that the lodging industry is two years into a recovery cycle that is likely to last five years.
Doug Kessler, chief operating officer at Ashford Hospitality Trust Inc. (AHT.N: Quote, Profile, Research) was less bullish on the valuation cycle, but did note that publicly listed lodging REITs are trading at about 10.6 times 2006 estimated earnings, compared with 16 to 18 times for other property types.
“Hotels still look cheap relative to other assets,” said Greg Wolkom, head of lodging and leisure at investment bank Banc of America Securities LLC.
CNL would still consider buying certain luxury resorts, but “we will probably be a seller at some point this year,” Hutchison said.
(Source: Reuters)