It’s been said that the only bad time to buy property is later. Despite volatility within capital markets and the attendant interest rate hikes, the maxim still holds true for those in a position to make deals: buy now when the option presents itself; brush aside the worry.
There is no doubt that hotel transactions on aggregate have slowed after a rather heady 2022.
Last year, according to JLL, global hotel liquidity reached $71.1 billion, a 2% decline versus 2021, and well off the almost $100 billion worth of hotel transactions in 2015. Though global investment volume in dollars was down, hotel trades continued their rise, close to a record 1,800 in 2022, showing that there is an appetite to transact, just at a lower amount.
As the cost of debt has risen, so, too, has the cost of capital, making it more difficult for deals to consummate. The Federal Reserve kept the target range for the federal funds rate at a 22-year high of 5.25%-5.5% in its September 2023 meeting, following a 25-basis-point hike in July. Interest rates are now high compared to two or three years ago, but in the context of the last 50 years, they are running at around the long-term average. It has slowed deal volumes, nonetheless, and caused a chasm within the bid-ask spread, where owners are propping up their assets against strong cash flow, while prospective buyers are examining valuations.
The upside for buyers is that the cap rates are much better for the purchaser.
As noted in this issue’s JLL perspective, it’s the luxury segment that will continue to attract liquidity, especially as the affluent segment grows, which helps drive luxury hotel performance. Luxury hotels represented 24% of single-asset global hotel liquidity through August 2023, the highest portion since 2015.
While all assets may be commercial real estate, all commercial real estate is not equal. Though U.S. commercial property valuations are down 16% from their March 2022 peak, according to the Green Street Commercial Property Price Index, it’s not evenly spread out. In fact, of all commercial asset classes, lodging, according to Green Street, has held up the best with prices within 5% of peak levels. No surprise, the office sector has fared significantly worse than average. Besides buying a hotel at healthier cap rates, I think office space is probably even a better asset class because it has been hit so hard.
If you ask me, it’s time to double down. Big question, where is the financing? Some look to alternative financing like EB-5, USDA loans and CPACE when debt funds are too expensive and LTVs have dipped. Financing is clearly the bottleneck these days. But in terms of timing, my opinion is it’s time to buy commercial real estate in the next 18 months.