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Cornerstone sees full-service opportunity

HARTFORD, Connecticut—Jim O’Shaughnessy still believes in the full-service hotel sector.
O’Shaughnessy, the managing director of Cornerstone Real Estate Advisers’ Hotel Group, said the company is in the early stages of developing two smaller, 200-room independent full-service hotels. He declined to provide additional details but said one of the properties is in a Northeastern U.S. coastal city with the other in a major Mid-Atlantic city. Both projects are under agreement with developers.
While select service has been the darling of the industry for some time, O’Shaughnessy said full service still can be successful—provided it is the right kind of full service.

The existing stock of full-service product is dated and needs to be updated for the modern traveler, he said. Smaller, more intimate full-service hotels can find a niche in the market.
“We have looked at and are interested in premium select service,” he said. “We like it and would consider it. But in many markets right now, there has been a scarcity of full-service development.”
As for new construction, O’Shaughnessy described the development climate as akin to the Goldilocks principle: “There’s not too much, and there’s not too little,” he said. Going forward, Cornerstone likely would develop an even split between full- and select-service assets.
Lenders are remaining disciplined in their underwriting and are being careful about which locations they are lending into, O’Shaughnessy said. “Thank goodness,” he added.
Cornerstone’s hotel portfolio comprises $2.8 billion of assets and represents between 20% and 25% of the company’s overall equity. The portfolio represents 28 luxury hotels, resorts and business-class hotels with more than 8,800 guestrooms as of the first quarter of 2014.
O’Shaughnessy said one of the biggest challenges he faces is in trying to convince investors the hotel sector is worth a look.
“We’re trying to expand our roster of hotel clients,” he said. “We still see investors who see hotels as volatile or as too much of an operating business. One of our challenges is just telling the hotel story.”
Another page of Cornerstone’s hotel story is its activity in the transactions market. During the past three years, the company has completed $700 million of hotel deals and acquired eight assets. Most recently, the company acquired at the end of June the Motif Seattle.
“Over a three-year period, that’s real busy,” O’Shaughnessy said.
The firm is being selective in which properties it chooses to pursue via the acquisition route, he said. In the deals it does complete, O’Shaughnessy said there has to be some sort of value creation in play, such as through a change in management or removal of a brand to create an independent property.
O’Shaughnessy said the firm is likely to make investments in, on average, two to four properties annually in the near term. That includes development deals and transactions.
“We’re very bullish on the future of this industry,” he said, adding, “I believe we have some real running room left in the cycle.”
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