NY Hotel Investment Market: Resiliency in the hotel investment market unmatched by any other city in the world

After finishing 2011 and 2012 as the top hotel investment market in the world in terms of total transaction volume, New York has dropped to second place behind London through September 2013 year-to-date. So far in 2013, London has recorded $1.2 billion of transaction volume, followed by New York with $840 million. Singapore and Paris are tied for third place with approximately $775 million each. From a price-per-key perspective (including all hospitality property segments), Singapore is the most expensive market, averaging over $660,000 per key as of YTD September 2013, followed by New York, Paris and London, at $580,000, $500,000 and $430,000, respectively. With three months left in the year, New York will have the opportunity to catch up, especially when considering the amount of hotel product for sale, the current state of the capital markets, and the city's stronger than ever appeal to off-shore investors. In 2011, transaction volume in New York alone peaked at $3.5 billion, of which more than 90% was domestic investment driven primarily by REIT activity. In 2012, transaction volume dropped to $2.3 billion as a result of fewer large hotel transactions and lessened REIT activity, although off-shore acquisitions jumped to 36% of total investment, representing a 260% year-over-year increase in absolute dollar volume. The pursuit for luxury hotel product from the international investment community in 2012 resulted in the highest price per key ranges achieved for a transaction since the onset of the economic downturn in 2009, with hotels trading in excess of $1.5 million per room. While some domestic investors reacted with sticker shock, New York trophy properties are still perceived as "more affordable" to the rest of the world since they typically trade at a discount when compared to the $2 million to $3 million-per key levels paid by trophy collectors in markets like London, Paris and Singapore. Since 2012, private equity and institutional investors have emerged as the driving force in the New York acquisitions market, acquiring well over 50% of hotel properties for sale over the last 21 months. Their appetite has been fueled by favorable debt markets and strong operating fundamentals. Off-shore capital has followed suit and is now the third most prominent buyer of New York hotels, with Asia being the largest source of overseas investment, evidenced by the acquisition of The Plaza, Dream Downtown, Cassa Hotel and the Setai Fifth Avenue. From a macroeconomic perspective, in 2012, Asia was the largest global exporter of capital, with nearly $4.4 billion of hotel investments worldwide, followed by the Middle East with $2.1 billion. So far in 2013, the Middle East has invested $3.1 billion in global hotel real estate, closely edging out Asia's $3 billion of capital, with most of their combined $6.1 billion in funds destined towards Europe. According to our most recent investor sentiment survey, New York is the main target market for both Asian and Middle Eastern capital looking to establish a foothold in the US. When asked about the type of assets they are interested in, most off-shore investors state they are targeting full-service, upper upscale and luxury branded and unbranded hotels; with some international brands backed by private developers and HNWI looking for ground-up or conversion opportunities to secure luxury product in established luxury addresses (i.e. proximate to Central Park). When considering overall investor returns, capitalization rates in New York command a premium of 100 basis points when compared to London, Paris and Singapore. From an IRR perspective, New York prices at a 300-basis point premium. The fact that investors are pricing New York at a discount could be explained from the fact that the supply pipeline in New York is considerably higher than in London, Paris and Singapore, with over 5,000 rooms currently under construction. It should be noted, however, that even though supply in New York has increased by more than 18% since 2008, occupancy rates are back to peak levels and growing. In terms of RevPAR in 2012, London, Paris and Singapore all performed in-line or above 2008 peak levels, with Singapore's RevPAR exceeding prior peak by 28%. The amount of supply that has entered New York has extended the market recovery period by 12 to 18 months, with year-end 2012 RevPAR finishing at a 7% discount from prior peak performance. Despite the lag in fundamentals, New York continues to lead the charge, achieving a RevPAR premium of more than 30% when compared to its peer cities. Will New York continue to top the charts in investment volume going forward? Only time will tell. Off-shore investors have amassed their holdings in Europe and are now looking to expand into the US, with New York being their first port of entry; debt markets continue to be favorable and are driving private equity investment; cash-rich brands are aggressively expanding and forming strategic alliances with institutional investors; newly-formed private REITs are putting their equity to work; and operating fundamentals are stronger than ever as a result of record breaking visitation/demand levels. Whether first or second in investment volume, the story of resiliency in this market continues to be unmatched by any other city in the world. Gilda Perez-Alvarado is executive vice president of Jones Lang LaSalle Hotels & Hospitality Group, New York, N.Y.