Founders of Pracrea Inc. and AQQire, from left, Robert Astudillo, Mukesh Mowji and Tarun Patel, at Golden Gate Park in San Francisco. Pracrea Inc. is a software development company that in 2013 launched a proprietary platform for online commercial real estate sales and AQQire lists inventory from hundreds of sellers connected to its national database. The company has expanded its inventory to include other CRE assets to feed the appetite of investors in search of new opportunities. (Photo by Peter Lyons, Lyons Photography, for Asian Hospitality)


When former AAHOA chairmen Mukesh Mowji and Tarun Patel launched Pracrea Inc., an online commercial real estate sales platform, a few years ago they were laser focused on selling an electronic solution and signing up clients – brokers, sellers and buyers. Today, the technology is commonly used in searching, selling and buying hotels. If there is a hotel for sale in the U.S., Pracrea probably knows about it.

The company in San Jose, California, is a developer of a software platform that enables commercial real estate companies and individual brokers and sellers to list hotels for sale and manage the workflow associated with a sale.

Soon after Mowji and Patel launched Pracrea in 2013, it acquired The Hotel Inventory, an online listing site. Robert Astudillo is founder of The Hotel Inventory, now called AQQire.

Since Astudillo started the online site in 2009, it has marketed more than nearly $10 billion in hotel assets. The site markets an average of 800 hotels a day and has 3,000 daily active users. Registered are about 1,000 individual sellers and brokers hailing from about 10 U.S. and international companies including Ten-X Hospitality, Marcus & Millichap, Sperry Van Ness and Hotel Brokers Inc.

AQQire has seven years’ worth of hotel-transaction data. Besides knowing what’s selling, it also knows who is buying. More than 30,000 registered hotel investors conduct an average of 160,000 searches a month.

Changing its name to AQQire signals the company’s entry into other areas of commercial real estate investment. “For us to grow we need to accept more than just hotels,” Mowji said. Astudillo modeled AQQIRE to function like and residential sales platforms. AQQIRE has added gas stations, convenience stores, fast food restaurants, retail sites, apartment complexes and office buildings to its platform.  “It’s been the plan since day one,” Mowji said. “We have transitioned from a listing site to a true platform, allowing users to add their own content quickly and with low barriers to entry.”

AQQIRE officially launched in the winter. “So far, it’s been great,” said Astudillo, chief operating officer at Pracrea. “Traffic and user engagement are significantly up.”

The 35,000-foot view of the U.S. hotel transaction landscape available to Pracrea, brokers and advisory firms shows some emerging trends heading into 2018. New construction is slowing and redirecting investors to existing assets, particularly in the midscale sectors. Financing for such buys is plentiful and the cost of debt remains low.

But challenges exist. Hotel shoppers face a shorter list of value-add and opportunistic buys. Some experts say the buy-low-sell-high opportunities exist but require prospective buyers to dig deeper and look outside major markets. Room sales are at a record high and that means owners are enjoying healthy business returns, which leads to higher asset valuation – creating an impasse between the price at which owners are willing to sell and buyers are willing to pay.

Moving Beyond Hotels

Combined with Astudillo’s experience and tech prowess, AQQire can easily chart the ups and downs in the hotel – and now the commercial – real estate industry.

Patel said AQQIRE will list 300 to 500 other CRE assets in the coming months. “Our math shows that at any given time, there are about 2,000 hotels for sale. If you do the same math ratio for gas stations and convenience stores, we are looking at 150,000 assets with 6,000 for sale, respectively. Add to that restaurants and fast food sites and it just grows and grows.

The commercial real estate investment trend is going toward cross pollination because hotel businesses want to develop more well-rounded business models.” Many are attracted to more passive investments that are not as operationally demanding as hotels and where labor costs are lower, such as self-storage and multi-family units.

Much of the push to expand into other CRE assets is coming from the next generation of hoteliers. “They are less risk adverse,” Patel said. “They treat the family business as a true business.”

All Signs Are Go

Since rising out of the trough of the Great Recession, the hotel industry has ridden the coattails of the growing U.S. economy, which experts say will remain vibrant this year and next, pending any “black swan” event. Hotel transactions in 2017 slackened off a bit. Pracrea charted about $16 billion in hotel sales volume in 2017, about 10 percent less than in 2016, Patel said. A big reason for that is the wide – sometimes unreasonable – spread between the asking price and what a buyer is willing to pay. “The market is so strong,” Patel said. “But transactions are still happening, and it will grow this year as the pipeline of new hotels from 2016-17 come on line.”

Rate is not rising in tandem with demand, but experts anticipate the skittishness will wear off in the coming months and asset values will increase as a result.

Deloitte’s 2018 Travel and Hospitality Outlook, released in January, said, the U.S. hotel industry will see growth of 5 percent to 6 percent this year, “setting up the industry to hit a record-breaking $170 billion in gross bookings.” Demand from both business and leisure will increase ADR by 2.4 percent and RevPAR around 3 percent. Occupancy, however, has peaked at 66 percent.

Successes and challenges to driving rate will occur market by market, especially areas with a robust supply line such as New York City and Chicago, Deloitte said. In the past 10 years, room supply in New York City has increased by 55 percent to 634 properties and 115,000 rooms. Hotel operators in such markets lower rates to compete.

Helen Zaver, first vice president of investments and senior director of Marcus & Millichap’s national hospitality group in Atlanta, said while financing for transactions is available, lenders are pulling back on new construction, especially as building costs have skyrocketed. “The cost of building has increased substantially because recovery from the hurricanes (in Texas and Florida) has caused a shortage in supplies,” she said.

The silver lining is the high cost to build will slow hotel development and help stabilize the industry, she said. Demand for hotel rooms is robust as the growing U.S. economy and federal tax reform are creating more jobs, increasing pay and encouraging both business and leisure travel.

Midscale to Market

Meanwhile, Marcus & Millichap’s research shows hotel transactions in upper chain scales slowed in 2017 while lower-tiered assets, including economy, “garnered significant investor attention.” Also experiencing an uptick in sales were independent properties as “buyers widened their acquisition expectations,” said the report.

In the interest of keeping rates affordable for travelers, the midscale sector has taken on a new shine with owners repositioning existing hotels to compete in the segment or building newly branded properties.

Anthony Falor, managing director for Ten-X Hospitality, said new-brand proliferation is a cause for concern. “It’s the elephant in the room, and nobody wants to talk about it, but owners are starting to feel the impact.”

Ten-X lists a broad cross-section of hotels, including upper-upscale select-service hotels to full-service assets. “There’s a huge interest in those sectors right now. Because of that other buyers can’t compete and have reset their acquisition criteria into the midscale segment, where properties are not going at the high cap rates or price per key. Underwriting and return on equity are more achievable. At $130,000 to $140,000 a key, hoteliers can buy at a third of the cost to build.”

New midscale and economy conversion brands such as Red Lion Hotels Corp.’s Signature Hotel/Inn and Best Western Hotels & Resorts’ SureStay Hotels will most likely lead to more transactions.

“The middle market still has a lot of opportunity and value add, but many people don’t realize it,” said Dave Shah, CEO of Pineapple Capital Group in Panama City, Florida. The hotel asset market is divided into two top-selling categories: exterior corridor and interior corridor, he said. “They don’t compete with each other in value.”

Shah is a second-generation hotelier who helped his father and other first-generation owners divest of their older assets over the past two years. He has found that what was old is suddenly new again. “Buyers are taking old boxes in both primary and secondary markets and retro-fitting them with modern design.”

The hotelier turned financier believes the trend will gain greater momentum this year as more buyers become aware. “Buyers are looking for opportunities to add value, asking ‘How can I make more money?’”

He advised that people looking for value deals should shop close to home. “Look within arm’s reach, a 100- to 150-mile radius. Look for conversions, consult with franchisers, know the box and know the market.”

Shah also urges buyers of older assets to adapt the box to new technology, both guest-facing and for back-office operations. “Adapting to new technology is the major fight between first- and second-generation owners,” he said. “But you can’t get around it. Free Wi-Fi is a standard for all generations of travelers. Installing modern technology is what breathes new life and business into the older and exterior corridor hotels.”

New or revived brands such as Signature and SureStay are solving a dilemma faced by many owners of older properties as these assets fall out of favor with new or repositioned brands. “Most of these assets are value-adds,” Falor said. “We saw two different types transact last year – exterior corridor and full-service midscale. They were bought at the right basis and rebranded. We also saw new owners go independent and connect to a strong [reservation and marketing] system through a soft brand.”

Single-Asset Strategy

Falor said he expects more hotels to flood the acquisition stream as Hilton’s REIT, Park Hotels & Resorts, formed a year ago, is expected to divest some assets. In addition, Wyndham Worldwide’s planned acquisition of La Quinta Holdings Inc.’s fee-based business and La Quinta’s plans to establish a REIT with its owned hotels will lead to more divestitures. The merger of FelCor Lodging Trust with RLJ Lodging Trust will most likely create an asset-light model in 2018.

The rebound in REIT stock prices in 2017 at an average 25 percent will also lead to new selling and buying strategies as investors take a hard look at existing portfolios.

Falor expects 2018 transaction pace to be like 2016 and 2017 when the company brokered about $500 million in sales each year. “We closed on more than 100 transactions in 2017, and the types of properties ran the gambit, from independents to full service, limited service and across all segments.”

Daniel Lesser, CEO of LW Hospitality Advisors, said most of the transactions in 2017 were single-asset sales totaling $13.6 billion. None of the hotels were part of a portfolio. He expects the trend to continue in 2018. “There are always good deals to be had,” he said.

The company’s 2017 Major U.S. Hotel Sales Survey includes 182 single-asset-sale transactions (51,000 rooms) of more than $10 million each. Average price per key was $267,000, an 11 percent decline from the year before.

In 2016, LW Hospitality Advisors’ research found 172 single-asset sales (42,400 rooms) totaling $12.7 billion with an average price per key of $300,000. Lesser noted in 2016 more large hotels were sold than in 2017.

Capital to buy hotels will remain cheap in 2018, said Tom Engel of T.R. Engel Group LLC, an advisory firm for institutional investors. The low cost of financing fueled the new-construction trend over the past several years. “New hotels reigned in 2017,” he said.

Investors spent December “truing up” their spending. “It was nothing but a good year, financially, for hotel investors,” Engel said. The challenge for 2018 is to keep commercial real estate investors’ interest in the hotel industry, especially as consolidation of pension fund investors and REITs shrink the ownership ranks. “There are only eight major hotel REITs left,” Engel said. Many investors are turning to other CRE assets. “The slowdown or caution light is clearly on in hospitality investment.”

Ask-Bid Standoff

Engel agrees that the ask-bid spread is problematic and is stalling the pace of transactions. “Owners are looking to monetize their net operating income at the lowest possible cap rate. A cap rate of 8 versus 5 per $1 million is millions and millions of dollars to that owner. It’s become a standoff and, as a result, owners are holding on.”

A cap rate is the ratio of net operating income to a hotel’s asset value. If a hotel generates an NOI of $1 million and sells for $10 million, the cap rate is 10 percent. Typically, the lower the cap rate the higher the sales price. Buyers want the opposite as they want to pay the lowest possible price for the asset.

“In the end, owners and investors will do what they believe is in their best interest; and today’s owners’ best interest is to be patient and not get discouraged at exiting cap rates,” Engel said.

Exercising patience seems to be the main caveat in early 2018. Dan Rama, co-founder of NewGen Commercial in Phoenix, Arizona, said the ask-bid spread is based on expectations of sellers and buyers. “In a successful transaction, the seller realizes the value of the hotel,” said Rama.

“Although hotel revenue increased in 2017, it was a flat year for investment,” he said. Many investors feel the cycle has peaked and are growing cautious as they fear a sudden downturn. “The impact of 2008 is still on everybody’s mind,” Rama said.

Higher Operating Costs

Stoking the caution is the increase in operating costs, which many hoteliers say are rising faster than revenue. “It brings the profit margins and investment yields down,” Rama said.

An August report by CBRE Americas Research showed hotel operators managed to keep a tight lid on labor costs by reducing staff and the hours they worked, but labor continues to make up more than half of a hotel’s operating expenses. “Despite their best efforts, labor costs still accounted for 90 percent of the 1.6 percent rise in total operating expenses from 2015 to 2016,” said the report.

CBRE Americas Research forecasts a 3.7 percent increase in RevPAR in the first quarter of this year. It contrasts with the company’s earlier projections of a less-than 3 percent annual gain in 2017 through 2019. Mark Woodworth, senior director of research, said the increase will be fueled by “sustained” average occupancy of 61.4 percent, which will stoke hoteliers’ confidence to raise rates to an ADR of $128.30.

Muting the gains, however, is the increase in rooms expenses, such as labor, housekeeping, reservation systems and sales commissions, which account for about 74.5 percent of a hotel’s cost, said CBRE in the August report.

The math is leading CRE investors to park their cash in other assets, investments that yield 6 percent or more, said Rama. NewGen Commercial has seen family offices and private equity acquire hotels and transform them into office or apartments. On one hand, it shows investors are indeed turning from the hospitality sector while on the other hand the trend opens the way for new hotels. “Buyers have to be visionary,” Rama said. “If the deal makes sense, take an older hotel and turn it into a something new or make it a better hotel. We are seeing this happen across the country.”

Cautionary Tales

The underwriting process is taking longer these days as all sides are exercising extreme due diligence, Rama said. With federal tax reform keeping the 1031 like-kind exchange in place, many hoteliers who sell will buy up, he said, but it will take longer to close a deal. “You have to have patience.”

Engel said banks, private equity and “in-between lenders” that provide mezzanine or bridge capital have money to lend, but are seeking the right deals. “They have an abundance of capital all dressed up and nowhere to go. So, instead of shifting through 10 deals and finding one, they’re shifting through 110 deals.”

One of those doing the shifting is Hospitality Ventures Management Group Inc. Mary Beth Cutshall, executive vice president of acquisitions and business development at the Atlanta-based company, said 2017 turned out to be better than she expected for transactions.

In December and January, the company sold two Embassy Suites by Hilton after sinking millions into renovations and repositioning the hotels to generate more revenue by increasing rate and attracting more and new business.

With those deals behind HVMG, “we are busy looking for new opportunities,” she said, noting the company is near closing on a few transactions, including portfolio sales. “There are definitely value adds out there, but there are not as many listings as I’d like to see. There are fewer opportunistic buys, and we have to look at a lot more deals than before. Opportunities exist, but you have to be careful.”

Cutshall advises anyone looking to buy an asset today to research the market, the hotel’s performance and new supply in the market’s pipeline. “These days call for extreme prudency,” she said. “If there is too much risk and not enough upside, kick it out of consideration.”

Bob Hunter, CEO of Hunter Hotel Advisors, said investors are sitting on “a huge amount of cash” and searching for the right deal. “Loans are also very available,” he said.

The pace of new construction has slowed because urban and main markets are built out or nearing that phase, and investors believe hotels in secondary and tertiary markets won’t produce the yield they want. “Demand for hotels is strong but the number of hotels available is small. Buyers are not willing to pay what the seller wants … yet.” Hunter believes the ask-bid spread will narrow this year.

“With high occupancy and nice rate, interest rates under control, low debt rates and high profit margins, it’s a great day to own a hotel,” Hunter said.