JLL: select service hotels poised for a boom.

Jones Lang LaSalle Hotels reported that the select service hotel sector in the U.S. is posed for a boom.

This follows the release of the firm's Hotel Investment Highlights--Select Service report, in which Jones Lang LaSalle Hotels estimated select service transaction volume for 2006 is on target to match a similar high to that of 2005, at an estimated $3 billion, or approximately 650 transactions.

Across the U.S., and especially in major urban gateway markets, the select service hotel market is poised for dramatic increases, based on three key market conditions.

The first is a widened gap between luxury/upscale properties and budget.

"As upper tier properties reach for higher star ratings and thus higher ADR, they've left a gap for the lower priced properties in the mid-scale and select service sector," said Adam McGaughy, a senior vice president for Jones Lang LaSalle Hotels Select Service Division in Chicago.

"Thus, more companies are entering into key urban gateway markets with select service properties to meet this demand."

Examples include the recently converted Hilton Garden Inn and Hampton Inn in Manhattan, Four Points by Sheraton in Chicago, and SpringHill Suites Atlanta Buckhead.

Functional obsolescence of first-generation prototypes is the second factor.

Hotel properties built in the 60s and 70s represent first generation select service prototypes. "Typically, a property such as this sits on a large piece of land but does not represent the land's current highest and best use. They often have only a few floors of rooms that sit on 5+ acre lot of land and have outlasted their best use as a hotel," said McGaughy.

"Compared to today's prototypes with a higher number of floors built for plots two acres and fewer, these properties have outlasted their 'best use' as a hotel, and are being demolished for new utilization of the land or in some instances converted into other uses, such as condos or senior living," McGaughy said.

And the third factor is conversions. "New brands, such as aloft and Hyatt Place, and prototypes, such as Fairfield Inn, Hampton Inn, Holiday Inn Expressand Residence Inns, are entering the market and often times the older prototypes are not being renewed," said Mark von Dwingelo, a senior vice president for Jones Lang LaSalle Hotels Select Service Division.

Hotels continue to provide an exceptional counter-cyclical position, good risk diversification by asset type, strong comparative returns, and a steady annuity income stream. Hotels offer one of the best positions on the real estate cycle, having experienced the worst downturn and now firmly positioned in the growth phase, making 2006 an excellent time to invest in this asset class.

Hotels are well positioned to continue outperforming other property types over the next few years. The hotel sector maintains the most upside of the five major property types in terms of investment returns. It is the only one of the five major commercial property types in which income has outpaced appreciation in terms of total return contribution over the last year.

Regarding the spread between cap rates and Treasuries, hotels are the only major property type currently trading wider than its 10.5-year long term average, and thus, using this measure, is the sector with the most upside potential.

2006 is gearing up to be another record breaking year for select service properties. "The combination of strong industry fundamentals, historically low interest rates, rising cash flows, and a strong capital market are expected to keep hotel real estate in the spotlight," said Kristina Paider, senior vice president of marketing and research for Jones Lang LaSalle Hotels.

And although the supply pipeline for select service properties is mounting, it is still relatively in check and warranted given the rapid increase in RevPAR over the past few years.

The lodging industry will continue to attract the attention of investors, seen by many investors as the real estate market sector with the most potential, bringing larger groups and new entrants into the hotel investment arena. As a result, there will be more available capital chasing less available product, driving both demand and prices higher in the year to come.