Why global hotel investors are extending their stays in New York
Lured by a roaring economy and the promise of stable long-term returns, foreign investors are pouring capital into New York hotels at a historic rate.
According to JLL’s hotels experts, offshore investors poured $1.9 billion into New York hotel transactions in 2014, accounting for 58 percent of total transactions in the city—up from just 12 percent in 2013. This year, JLL expects transaction volumes in New York tied to offshore capital to reach $3 billion.
Much of the new capital is flowing from Chinese investors, spurred by new national policies on overseas purchases. The Chinese could account for $5 billion worth of global hotel sales in 2015, according to JLL’s annual
Hotel Investment Outlook.
But investors from Qatar, Bahrain, Kuwait, Malaysia and Singapore, to name a few, have also proven willing to move outside their traditional comfort zones in trophy office properties and into the U.S. hotel sector. In 2014, investors from those countries acquired seven hotel assets in New York with a total value of $1.5 billion.
“New York has long been one of the top global hotel markets and represents a strong, secure option for offshore investors, but it’s not just the Chinese pursuing these assets,” says
Jeffrey Davis, Managing Director at JLL. “Confidence in the economy, an increased number of players in the market and strong operating fundamentals are driving intense competition for the top hotel assets.”
Call it the effect of “forever real estate”—properties that are likely to increase in value over the long term, no matter what happens in the broader market. International investors require a reasonable going-in rate of course, but that’s not their top priority, according to Davis. He notes these investors, in particular, tend to hold assets a long time and thus mainly pursue high-quality, prestigious hotels in primary markets.
Consider the sale of the Residence Inn World Trade Center. The new hotel in lower Manhattan is near the World Trade Center complex, numerous Fortune 500 companies, renowned shopping and dining and plenty of market-transforming development projects. The hotel’s prominent location attracted the attention of numerous investors, but it was ultimately acquired by a Middle Eastern investment shop.
Another vote of confidence came from Malaysia and Hong Kong-based Keck Seng Group, which last year acquired the SpringHill Suites New York Midtown Manhattan/Fifth Avenue and the Sofitel New York.
“New York is one of the leading cities of the world and boasts strong fundamentals that are ideal for long-term investment,” said Peter Wong, President of Keck Seng Group, whose U.S. office is in San Francisco. “We currently own and operate most of our hotel assets in Central Business District locations of international gateway cities and are especially confident in New York’s prospects. In particular, we anticipate newer and high-quality properties to perform extremely well in the long run.”
Like the other foreign investors, Keck Seng’s renewed interest in U.S. hotels stems in part from the strong economic recovery, led by rising employment and an appreciating U.S. dollar.
But the New York hotel market also boasts particularly attractive fundamentals. Smith Travel Research pegs the city’s hotel occupancy level at right around 85 percent in 2013 and 2014: the highest rate in the U.S. and one of the highest rates globally. Already one of the more expensive markets globally, the average daily rate (ADR) in New York increased nearly 2 percent from 2013 to 2014 to reach $263.45 and revenue per available room (RevPAR) increased 2.1 percent to $223.53.
With the influx of foreign investors, the already competitive market is getting even more heated, pushing prices up and cap rates down, even with more than 6,400 rooms added to the market last year. In 2014, the average cap rate for New York hotels was 5.5 percent, compared to 6 percent in 2013.
“Investors across the globe are ready to compete for New York hotels of all types,” says
Gilda Perez-Alvarado, Executive Vice President at JLL. “They're targeting large conversion and repositioning opportunities, relatively new mid-market assets and well-established large hotels.”
And Perez-Alvarado sees more of the same in the year ahead. “We expect 2015 will be a year of unprecedented transaction activity, sparked by offshore capital," she says.