By Sarah Trefethen
Hotels aren’t just for tourists anymore.
Investment activity in the lodging sector has skyrocketed in the past decade, according to a recent report by Jones Lang LeSalle which found that the price per square foot for hotel space in the city has outstripped both office and multifamily assets.
In 2011, the price per square foot for hotel, office and multifamily real estate assets in Manhattan equaled $752, $721 and $472, respectively, according to the report, titled “FocusOn: Evolution of Hotel Price per Square Foot.”
In 2012, the price per square foot for hotels is expected to increase to $890, due to high profile transactions like the Essex House Hotel, which traded in September 2012, and several other high-priced hotel sales that have closed or are expected to close by year end.
“Investment volume in New York hotels jumped to an all-time high of $3.5 billion in 2011, and we expect total investment volume will reach $2.4 billion in 2012,” Arthur Adler, managing director and CEO of Jones Lang LaSalle Hotels, Americas, said in a statement.
“The price per square foot for hotel properties has historically surpassed other asset classes, although the gap between hotel and multifamily prices has narrowed over the past two years.”
Lodging transaction volume in New York increased from $100 million in 2002 $3.5 billion in 2011, according to the report — an average annual growth of 50 percent.
In a review of historic data that focuses on the price per square foot of lodging assets, as opposed to the more traditional price per room, the report found that hotels were the one asset class that showed a slight increase in value on a per square foot basis during the economic downturn in 2009, increasing by one percent.
At that time, the per square foot value of Manhattan office space dropped by 54 percent, and multifamily sales showed a decrease average sales price of 17 percent.
But don’t start planning to convert all your multifamily investments to hotels just yet.
The multifamily sector exhibited the strongest recovery post-recession, according to JLL, with a price-per-square-foot increase of 71 percent between 2009 and 2011, compared to a boost of 34 percent for office and a drop of 24 percent for hotels.
The hotel price per square foot declined between 2009 and 2010, even though the transactions market was considerably stronger in 2010 and 2011.
“Although surprising, the decline in price per square foot for hotels can be explained by looking at the type of hotels that were sold in 2009,” Amelia Lim, EVP of Jones Lang LaSalle Hotels’ Strategic Advisory and Asset Management division, said in a statement.
“The hotels sold that year were overwhelmingly smaller and newer select service hotels. Those transactions skewed the price per square foot upward in a year when there were few transactions overall.”
The price-per-square-foot comparison was calculated using a new index created by Jones Lang LaSalle Hotels to make it easier for investors to compare the value of hotel properties with other real estate assets.
The index was derived through an analysis of hotel sales completed in Manhattan during the 10-year period from 2002 to 2011, encompassing activity across economic cycles.
For each sale, the building’s gross square footage was obtained from public sources and adjusted to exclude components that were not part of the transaction, such as commercial or residential interests.
