Select-service lodging gets 4 stars from private equity firms

Private equity firms including Starwood Capital Group and Clearview Capital have been the top buyers of select-service hotels this year, pushing up prices for the properties, Jones Lang LaSalle Hotels said.

Opportunity and private equity funds completed $519 million of select-service hotel purchases this year through July, or 35% of total sales of such properties, the London-based hotel investment services firm said in a report released Thursday. That’s up from $327 million, or 19% of transactions, a year earlier. Select-service hotels usually lack such amenities as full-service restaurants.

Lodging properties in markets where traveler demand is recovering are proving attractive acquisition targets for private equity companies that can take advantage of low-cost debt, said Samantha Fisher, a senior vice president at Jones Lang. Capitalization rates, a measure of investment yield, are likely to fall to 8.6% in the coming six months for limited-service hotels from 9% late last year, Jones Lang said.

“Lower cap rates show that these hotels are getting more expensive, and that means the competition is back,” Ms. Fisher said in an interview. In the past several months, there have been more bids per property at any time since the U.S. financial crisis, she said. “We’ve seen a dozen or so offers on some of the limited-service hotels.”

REITs, historically the most active buyers of the hotels, fell to second place. They were responsible for 31% of purchases, according to Fisher’s company, a unit of Chicago-based broker Jones Lang LaSalle Inc.

Purchases by Starwood Capital, founded by Barry Sternlicht, accounted for nearly half of select-service hotel acquisitions by private equity funds this year through July. The company bought more than $200 million of such properties, Jones Lang LaSalle Hotels said.

Blackstone Group’s planned acquisition of the Motel 6 lodging chain will add $1.9 billion to this year’s transaction volume once completed, Jones Lang said.

“The returns on limited-service hotels are great,” Ms. Fisher said. “These hotels make money because they are much less expensive and simpler to run.”

Private equity transactions this year include Clearview Capital’s acquisition of an Embassy Suites property in Valencia, Calif., and Noble Investment Group’s purchase of the Hilton Garden Inn Boston Waltham in Waltham, Mass. Both acquisitions were made in May for undisclosed amounts.

“Over the next six to 12 months, we expect private equity funds to remain at the forefront of select-service investment,” Mark Fair, a Jones Lang LaSalle Hotels managing director, said in a statement.