The five-year-old Standard Hotel in Manhattan was built for about $240 million. Bidders are in talks to pay more than $400 million. Kevin Hagen for The Wall Street Journal
The Standard Hotel in Manhattan's bustling Meatpacking district became famous a few years ago when some of its more brazen guests disrobed in front of its floor-to-ceiling windows.
Now the downtown hot spot is raising eyebrows for a different reason: a near-record sales price.
Final bidders include a group led by investor Steven Kantor. They and others are in negotiations to pay more than $400 million for the five-year-old property, say people familiar with the matter. The Standard, which is managed by hotelier Andre Balazs's company, sits above the city's elevated pedestrian park known as the HighLine and attracts a young and chic crowd.
The price would represent at least $1.2 million a room, these people said. That would be the highest paid for a U.S. hotel on that basis since the financial crisis, and the fourth highest ever, according to broker Jones Lang LaSalle.
Poised to profit are owners Dune Real Estate Partners and Greenfield Partners, which spent about $240 million on the hotel and its restaurants and nightclub beginning 10 years ago, according to a person with knowledge of the deal.
The hotel market is booming, fueled by rising room rates, more tourism and business travel, and demand from investors who are new to the business. While the volume of sales rose in all commercial real-estate sectors, the lodging industry logged the biggest increase in 2013.
The value of U.S. hotel transactions hit $22 billion last year, up 35% from 2012 and a nearly tenfold increase from the low point in 2009, says Jones Lang LaSalle.
That is still about half the money spent in the peak year of 2007. But a number of recent deals rank among the priciest ever. Manhattan's Park Lane Hotel, Miami's St. Regis Bal Harbour and the London West Hollywood each changed hands for around $1 million a room—often considered a watershed level that had been reached only about a dozen times previously in the U.S., according to Jones Lang LaSalle.
Those deals are helping drive the average sales price to new highs. In 2013, the average price per room for hotel sales of $10 million or more was $217,000, topping the $215,000 average in 2007, according to investment bank MLV & Co.
Some wonder how much longer the good times will last. Until now, hotel values have been rising partly because there has been scant new supply delivered to the market.
But for some of the hottest hotel markets, that is about to change. In seven major metro areas—including New Orleans, Houston, Seattle and Los Angeles—the number of rooms under construction has at least doubled over the past year, according to Smith Travel Research.
Paul Whetsell, chief executive of Loews Hotels, says his company is looking to buy about half a dozen properties this year, up from last year when Loews bought two hotels and started construction on two others.
But he thinks that prices in some cities are starting to look stretched. "Valuations in major markets are getting a little frothy," he says. "That is particularly so in gateway cities like San Francisco and New York."
Values of hotels typically rebound faster than other property types during an economic recovery because they can raise rates on a daily basis. Office and retail landlords, on the other hand, often have a harder time capitalizing on a recovery because they are locked into long-term leases.
Of course, hotels also are more vulnerable than other property types to a down market for the same reason. But some real-estate investors and analysts say the trends in the hotel market look better now than they did during the previous run-up.
PKF Hospitality Research forecasts that revenue per room, a popular hotel performance metric, will continue to rise at about double the 2.9% long-term average. If PKF's forecast is right, that would mean six consecutive years of so-called revpar growth of at least 5.4% through 2015.
Even with the recent pickup in sales activity, hotels still yield more than other property types. At the end of last year, the average initial yield on sales, known as the capitalization rate, was 8.2%, according to Real Capital Analytics. Such returns—which fall as prices rise—look particularly attractive in a low-interest-rate environment. By comparison, retail and office cap rates were around 7%.
Foreign investors, which were only bit players in the U.S. hotel market during the previous boom, have become active buyers in major metro areas. Jones Lang LaSalle projects Asian and Middle Eastern buyers alone will spend about $3 billion on U.S. hotels this year, up 36% from 2013 and more than double the 2012 total.
For example, an Abu Dhabi sovereign-wealth fund paid nearly $300 million last year for one of Atlanta's largest hotels, the Marriott Marquis. On Monday, a hotel company led by Singaporean billionaire Kwek Leng Beng agreed to acquire the Novotel New York Times Square for $274 million.
Some players are taking advantage of the hot market by making for the exit. Starwood Hotels & Resorts Worldwide Inc., which had been selling on average about $350 million of properties a year since 2009, is looking to step up that pace now and raise about $3 billion from hotel sales by the end of 2016.
The company says it is doing this because of growing buyer demand, a pickup in bank lending to prospective buyers and a strong outlook for global travel. "I'm not sure I could see a better environment to explore an asset sale," says Simon Turner, Starwood president of global development.
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