Us Capital Trends | Hotel

2018 US CAPITAL TRENDS | HOTEL The rebound in hotel deal activity in 2018 drove sales 2018 transaction $42.0b volume volume up to the third highest annual pace on record. YOY volume Only 2015 saw deal volume come in at a higher level. 50% change No one deal drove this growth in 2018. YOY price 1.6% change The hotel market has been through a bit of transition over Annual Transaction Volume & Pricing the last two years, with falling deal volume and changing Hotel pricing metrics. The fact that the growth in deal volume $b Individual PortfolioHotel Entity RCA CPPI 90 120 in 2018 was not driven by one big portfolio or entity- 90 120 level deal suggests that buyers and sellers have come 80 80 100 to a better understanding of where assets should price 70 100 following this transition period. 70 60 80 60 80 It is not as if there were no entity-level deals in the hotel 50 market in 2018. The Pebblebrook Hotel Trust takeover of 50 60 LaSalle Hotel Properties drove a 336% pace of growth 40 60 40 for entity-level deals in 2018 in fact. However, entity-level 30 40 deals were not the only source of growth in deal volume 30 40 levels. 20 20 20 10 20 The largest source of growth from a dollar volume 10 perspective was from portfolio deals. Such deals were 0 0 0 0 up $8.5b from the pace set in 2017. There was no single big portfolio driving this volume. Two portfolios sold at Year-Over-Year Change prices above $1b and 22 portfolios sold at prices north of YOY vol chg YOY price chg 150% YOY vol chg YOY price chg 45% $100m. 150% 45% 100% 30% 100% 30% Single asset sales contributed to the growth in the year as 15% 50% 15% well. Volume expanded at a 9% YOY pace in 2018. This 50% 0% growth puts single asset sales in 2018 up to the second 0% 0% 0% -15% highest annual level on record as well. Only 2015 saw -15% -50% -30% more single asset deal volume. -50% -30% -100% -45% -100% '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 -45% Hotel property prices grew in 2018, though at a modest '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 pace. The RCA CPPI for the hotel sector was up only 1.6% for the year. That modest growth though was finally Q4 '18 2018 enough to bring prices for the year up higher than the Vol ($b) YOY Vol ($b) YOY previous peak level for prices set in 2007. Hotel Total 14.2 125% 42.0 50% Full-Service 10.7 157% 28.1 62% Limited-Service 3.5 63% 14.0 31% Single Asset 6.6 24% 25.2 9% In This Issue: We examine pricing and deal activity Portfolio & Entity 7.6 669% 16.8 245% trends for the fourth quarter and in 2018 overall. We Major Metros 6.6 237% 14.7 65% Secondary Mkts 5.2 106% 16.7 58% highlight the markets with record activity and rank the Tertiary Mkts 2.3 29% 10.5 24% top deals and players of the year. ©2019 Real Capital Analytics, Inc. All rights reserved. Data believed to be accurate but not guaranteed or warranted; subject to future revision. 1 US CAPITAL TRENDS | HOTEL Trends of 2018 The hotel sector outperformed commercial property in general in Q4’18 in terms of growth in deal volume. The Quarterly Transaction Volume hotel sector posted a 125% YOY pace of growth in $b Limited-Service Full-Service Q4’18 while commercial property overall was up only 12 20% YOY for Q4’18. The Pebblebrook deal closed in Q4’18 though, so looking at single asset sales can 10 provide a clearer picture. 8 The pace of growth for single asset deal volume generally accelerated throughout the year. On average, growth in 6 single asset sales was flat in the first half of the year but 4 increased at a 24% YOY rate in Q4’18 vs. only 2% YOY growth for commercial property overall. 2 There were some troubling signs with the deal volume in 0 December, where single asset sales were up only 2% from '13 '14 '15 '16 '17 '18 a year earlier. Single asset sales for commercial property 6.5% broadly fell 4% YOY in December, so the hotel sector was Cap Rates still outperforming in December, but clearly there was a All Htl Full-Service Limited-Service change in this month. 9.5% One problem that came to roost in December was the growth in volatility in the financial markets. The 10yr UST 9.0% had surged past the 3% level into late September and early October which introduced a sense of caution on the part of 8.5% buyers for deals that were underway. 8.0% Despite the turmoil in the financial markets, hotel cap rates have not responded with similar moves. Cap rates 7.5% for limited-service hotels fell 30 bps from a year earlier in Q4’18 to hit 8.9%. Full-service hotels had cap rates at 7.7% 7.0% in Q4’18, unchanged from the levels a year earlier. '13 '14 '15 '16 '17 '18 Investors should not expect that hotel cap rates should Year-Over-Year Change have moved in lockstep with the 10yr UST. After all, they Property Prices never have moved in that way in previous years. In fact, Hotel All-Property cap rates for the hotel sector were climbing into 2016 20% even as the 10yr UST was hitting new lows. Fears over NOI impacts from new construction drove those cap rate 15% increases — fears that are now fading. The RCA CPPI for the hotel sector has underperformed 10% relative to commercial property overall in 2018. Prices were up only 1.6% in Q4’18 versus 6.2% for the All-Property index. In the first half of 2018 when volume was muted 5% on a year-over-year basis, hotel prices were climbing at an average 6% YOY pace. Volume increasing again as price 0% growth cools suggests that buyers and sellers have come '13 '14 '15 '16 '17 '18 closer to one another on pricing expectations. YOY change in RCA CPPI; hotel not part of All-Property RCA CPPI *Hotel not part of All-Property RCA CPPI 2018 | ©2019 Real Capital Analytics, Inc. All rights reserved. Data believed to be accurate but not guaranteed or warranted; subject to future revision. 2 US CAPITAL TRENDS | HOTEL Top Markets Sale activity grew at a pace greater than 100% for the year in to #11 in 2018. This growth is partly due to exposure to the 12 out of the top 25 markets for deal volume in 2018. Despite Pebblebrook entity-level transaction which accounted for the strong growth across so many markets, only in three 58% of the deal volume in this market. Even without this markets did the pace of deal volume hit a record high level. deal though, volume would have been up over 50% for the year and put San Diego ahead of Nashville in the rankings. The three markets which hit record high levels in 2018 were not driven by the Pebblebrook entity-level transaction. Manhattan retook the #1 slot in the rankings from Los With the exception of San Diego, the only markets where Angeles. Deal volume here grew by 97% in 2018 as buyers that transaction provided a lift on this list was the 6 Major and sellers came closer together on price expectations. Los Metros of New York (Manhattan), San Francisco, Boston, Los Angeles, though, fell off sharply in the rankings from the #1 Angeles, DC, and Chicago. slot to #6. This fall came despite deal volume that is largely unchanged from a year earlier. With volume stalled out in While San Diego is a location that industry participants visit Los Angeles while accelerating at triple-digit rates in many often for conferences, it is not the largest market and does other markets, it is difficult to keep from being passed in not always make it into lists of top markets. Indeed, San the rankings. Diego ranked only at the #28 position in 2017 but moved up Most Active Hotel Markets 2018 2013 2017 2018 Market Sales Volume ($m) YOY 1 2 1 Manhattan 3,049 97% 3 10 2 San Francisco 2,214 272% 7 7 3 Hawaii 1,864 160% 14 9 4 Boston 1,602 136% 13 8 5 Phoenix 1,560 126% 6 1 6 Los Angeles 1,544 -1% 21 11 7 DC 1,516 158% 4 16 8 Orlando 1,278 141% 20 36 9 Denver 1,060 442% 15 3 10 Dallas 1,046 -23% 9 28 11 San Diego 1,014 264% 33 6 12 DC VA burbs 1,009 36% 10 15 13 Chicago 1,007 87% 53 13 14 Tampa 826 49% 12 5 15 Atlanta 796 -13% 40 43 16 San Antonio 731 429% 26 18 17 Seattle 636 41% 23 24 18 Broward 621 88% 38 21 19 Philadelphia 577 53% 5 4 20 Honolulu 558 -41% 104 53 21 Las Vegas 517 363% 17 22 22 Inland Empire 467 30% 8 23 23 Houston 464 33% 31 72 24 Nashville 413 566% 83 99 25 Palm Beach Co 412 1271% Markets in orange denote record high annual volume in 2018 2018 | ©2019 Real Capital Analytics, Inc. All rights reserved.

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