REITS Fall out of Favor, Report Says


The lagging market for commercial mortgage-backed securities and the diminishing popularity of real estate investment trusts have slowed sales of hotel properties and threaten to touch off a selling spree of pricey hotels and resorts, according to a report from Atlas Hospitality Group, which brokers hotel deals,.

Nearly 50 fewer hotels were sold in California during the first half of the year compared with the same period last year, the report said. At the same time, purchases of hotels by REITs - which had accounted for 24 sales worth a total of $834 million a year ago - fell to just two transactions totaling $18.5 million in the recent six-month period.

Hotel prices also moved up more in the country than anywhere else in the state, with the median price per room surging 53% to nearly $55,000.

The report from Costa Mesa, Calif.-based Atlas attributed the increased sales largely to the county's lack of REIT purchases in either the first half of 1998 or the same period this year.

According to the Los Angeles Times, the statewide sales declines can be traced to Wall Street's disenchantment with REITs, which had been a hot growth sector for much of last year but now engenders little of their former excitement as a short-term, high-yield investment.

The report from Atlas also stated that hotel REIT purchases in California are down 98%.

"Wall Street did fall out of love with [REITs] and that did cause real estate activity to fall off the chart," said Donald Wise, president of Corona del Mar-based Hotel Investments Inc.

Also contributing to the hotel purchasing slump, said Alan Reay, president of Atlas, was last August's collapse in the market for commercial mortgage-backed securities, which, despite the meltdown, still accounted for roughly half of all commercial real estate lending last year.

According to Reay, with REITs and CMBS out of favor, privately funded companies are now in a position to cherry-pick - and name their price for - hotels valued at $10 million and above.

He predicts REITs will begin divesting themselves of nonperforming and underperforming hotels as they switch from growth mode to cautious security management.

"People who are privately funded - it is going to be great for them," Reay said.