REITs’ Decline Could Put More Hotels in Play
The plummeting popularity of REITs and the sluggish market for commercial mortgage-backed securities have slowed sales of hotel properties in California and threaten to touch off a selling spree of pricey hotels and resorts, industry observers said Tuesday.
Nearly 50 fewer hotels were sold in California during the first half of the year compared with the same period last year, according to Costa Mesa-based Atlas Hospitality Group, which brokers hotel deals. At the same time, purchases of hotels by real estate investment trusts--which had accounted for 24 sales worth a total of $834 million a year ago--fell to just two transactions totaling $18.5 million during the recent six-month period.
Atlas President Alan Reay blamed much of the drop on investors’ attitudes toward REIT shares, which had been a hot growth security in 1997 and early 1998 but have since slumped amid rising interest rates.
Hotel REITs were able to leverage the enthusiasm and accompanying capital in 1997 and early ’98 to snap up undervalued lodges and resorts. In the first half of last year, Atlas reported, REITs purchased 10 hotels in Los Angeles County alone. So far this year, they haven’t bought any in the county. Overall hotel sales in the county have also dropped nearly 50%.
“Wall Street did fall out of love with [REITs] and that did cause real estate activity to fall off the chart,” said Donald Wise, president of Corona del Mar-based Hotel Investments Inc.
Meanwhile, Orange County was among the few regions in California to post growth in hotel sales during the first half. The report attributes the increase largely to the county’s lack of REIT purchases in either the first half of 1998 or the same period this year.
Also contributing to the hotel purchasing slump, Reay said, was last August’s collapse in the market for commercial mortgage-backed securities, which, despite the meltdown, still accounted for roughly half of all commercial real estate lending last year.
With REITs and commercial mortgage-backed securities out of favor, Reay said, privately financed companies are now in a position to cherry-pick--and name their price for--hotels valued at $10 million and above. He predicts REITs will begin divesting themselves of nonperforming and underperforming hotels as they switch from growth mode to cautious security management. “People who are privately funded--it’s going to be a great time for them,” Reay said.
The Atlas report called the $260-million purchase of Century Plaza Hotel & Tower the largest first-half sales transaction in Los Angeles County, with the 30-year-old Century City landmark fetching about $248,565 per room.
