The REIT Vacancy

The recession of the last few years has taken a toll on just about every area of the residential and commercial real estate markets. The nationwide plunge in values has caused a new, more cautious mentality to predominate among investors. The markets' recovery, of course, has been largely sluggish, with the exception of certain recession-induced growth sectors like self-storage and multifamily.

Hospitality, like office properties, is proving much slower to recover, but there are now signs of hope for some hotels and motels and those who invest in them. The glut of new hotel projects just before the recession has led to decreased occupancy, room rates, and of course, overall property values. But that's beginning to change.

As Jones Lang LaSalle's (JLL) Lauro Ferroni tells GlobeSt.,

A lot of that [hotel] supply has come online already [...]. That's good news for existing properties. There's not a single luxury hotel now under construction, that's a key difference from earlier years.”

Just as the lack of multifamily and (to a much lesser extent) single-family construction has created an increased demand, so too has the lack of hotel construction prompted a bit of a rebound. To be sure, this rebound is still in its nascency–many hotel markets, including those as desirable as San Francisco and the Hawaiian island of Oahu, saw major setbacks last month. Other markets, like New Orleans and San Diego, enjoyed significant bumps in occupancy.

As one would expect, Manhattan continues to dominate the rankings for occupancy and nightly rates, thanks to the island's high level of commerce and tourism and its extremely constricted growth. While REITs like Hersha Hospitality Trust (HT) and Pebblebrook Hotel Trust (PEB) are focused on this active market, where occupancy rates are expected to reach 85% this year, REITs in general are shying away from hospitality investments.

Thanks to fairly tepid returns in 2011, and their accountability to shareholders, REITs are seeking investments with a more immediate payoff. In most markets, it seems, hotels simply aren't producing enough income to attract REITs, though this situation could change later in the year. While REITs' attention is diverted to other assets, however, private equity and smaller-scale firms have a great opportunity to invest in hospitality properties.

Since hotels and motels will remain a significant market force, those with patience–and patient money–have the opportunity to invest in these properties while they're most affordable. Eventually, the sector's demand will exceed its supply.