LOS ANGELES — Eighties British synth pop star Howard Jones ran off a bunch of top 10 hits. One, “Things Can Only Get Better,” reached number five in the U.S. on the Billboard Hot 100 chart in 1985. The music video (back in the 1980s, music videos mattered) is a melodic mishmash: a road crew setting up for a concert, Jones singing at the concert and, in a couple of spasmodic cuts, Charlie Chaplin and “Karate Kid” cosplay. It was the 80s.
Almost four decades later, things can only get better for the hotel industry—not that they are so bad right now.
At the Americas Lodging Investment Summit, the C-suite checked in with how they see things shaping up for the rest of the year. And like Jones, they seem to be, in large part, on the same page: things can, and will, get better.
Julie Arrowsmith, president and CEO of G6 Hospitality, which operates in the economy segment with two brands, Motel 6 and Studio 6, said the economy segment was “hit hard” in 2023, noting negative RevPAR and a shrinkage in supply. She said the economy segment is very much impacted by inflation that has impacted how travelers spend. “We saw shifts in traveler behavior,” Arrowsmith said.
The silver lining is that 2024, according to Arrowsmith, will be better for the economy segment. “Travel will continue to increase,” she said.
It should also be better for the entire hotel industry, too. Last year was no easy market to navigate: Though operating fundamentals remained strong, investing in the hotel space was tricky due to higher interest rates that have kept transactions volumes at bay.
“2024 will be a better year for the economy,” said Michael Lipson, CEO and chairman of Access Point Financial, a direct lender for hotels. “There is a tremendous amount of capital out there and they are not putting it into office and multifamily. Hotels are a tremendous place.”
He added that the spread for hotels had not significantly changed and predicted that spreads won’t tighten too much “because they never widened.”
2023 was a bumpy year for Margaritaville and its CEO, John Cohlan. He called 2023 “good,” but what he didn’t talk about was his New York hotel, Margaritaville Times Square Resort, which saw its owner, Soho Properties, file for bankruptcy. Arden Group, which had originally provided a $57-million mezzanine loan for the hotel, picked it up at auction.
Cohlan said that 60% of Margaritaville’s business is new builds, but that the cost of debt has delayed new projects. The key word being cost, because, according to Cohlan, “it’s not the availability of debt, it’s the cost of it.”
Deals Delay
In broad context, 2023 was a bumpy year for real estate on whole, said Jim Merkel, CEO and co-founder of Rockbridge. There were many converging events, he said, inflation being one and, somewhat surprisingly, COVID—still. Lower transaction volumes, he said, were a given, given that interest rates have shot up some 550 basis points combined with a quiet CMBS market, while owners battled with increased pressure on margins. He called 2023 “one of the harder years in memory,” but that a brighter year was ahead, “the beginning of good times,” as he referred to it. “When rates come down, and forward visibility clears, transaction volumes will pick up.”
Merkel isn’t the only one bullish on a headier 2024 transactions market. Kevin Davis, Americas CEO, JLL Hotels & Hospitality, said volumes will pick up in 2024 and that a potential rate cut coming in March might be further fuel for the fire, but that a hold on interest rates does just as good. “It’s signaling,” he said.
At the end of January, the Federal Reserve, having not attained its 2% inflation goal, decided to hold rates steady, in a range between 5.25%-5.5%, the highest in nearly 23 years. As of the end of December, the inflation rate stood at 3.35%.
“Over the past 18 months, we’ve been battling inflation,” Davis said. “The math today is largely the same. It’s still an elevated interest rate environment.” And though even a 50-basis-point deduction would help, “it won’t be enough to turn the spigot on,” Davis said. “It starts slowly.”
When it does, don’t think there will be discounted deals. “There is a difference between distressed and depressed,” Lipson said. “There are not as many as the former out there. You won’t be buying for 50 cents on the dollar.”