The hotel transaction market experienced a stronger than expected recovery last year, and all signs point to a continued increase in transaction volume. Through November 2021, there was US$36.2 billion in volume spread across both single-asset and portfolio sales, representing a 230% increase from the same period in 2020. However, given that 2020 was the most severe year of the pandemic, a more appropriate comparison would be to look at pre-COVID transaction activity.
Contributed by Eric Guerrero, HVS
According to RCA data, the total market activity for YTD November 2021 was 4% higher than the pace set over the same 11-month period of 2015 through 2019. This comparison gives most industry leaders optimism that this trend will continue. Outlined below are the key factors that I expect will influence the hotel transaction market this year, either positively or negatively.
Inflation was a big topic in 2021, and one of the major drivers was supply chain issues. Consumer prices rose in November 2021 at the fastest pace in 40 years. On a front-line level, the big issue has been employees becoming ill. With the Omicron variant, it was expected that inflation will heat up further in the first half of 2022, before cooling off toward the end of the year. To curb this trend, the Fed is planning to enact multiple interest-rate hikes this year and to end the bond-buying stimulus program soon. My hope is that they do not raise the rates faster than the economy can support, thereby hindering the recovery.
While I do not have an exact count on the number of properties available for sale, there is no shortage of high-quality, well-located hotel assets on the market. When buyers have more options, pricing typically decreases. However, with all the capital chasing these opportunities, we have not seen pricing cool off. With the transactions that we are currently marketing for sale or have under contract, we have seen pricing come in at or within 5% of guidance. Certain assets have traded for over the guidance. As a result, more and more owners are considering taking assets to the market. With more inventory available, I would expect pricing to level off sometime this year.
U.S. hotel occupancy dropped to 45.4% for the week ending January 8, 2022, which is 8% lower than the same week in 2019, but 8% higher than the same week in 2021. The drop was due to concerns over the Omicron variant. Additionally, operating costs have significantly increased during the past six months, with the rooms department, and specifically payroll, being the biggest factor. This increase has eaten into any RevPAR gains and has decreased NOI levels.
Normally, this situation would cause an increase in cap rates, but based on what we are seeing in the market, it is the exact opposite. Cap rates have compressed, mostly due to fierce competition among buyers and the willingness to accept a lower going-in return. Moving forward, the biggest risk is that another COVID-19 variant could emerge, further disrupting hotel performance.
Availability of debt capital
Lending volume began to pick up in the third quarter of 2021. Improving fundamentals on the operational side have helped ease the credit underwriting headwinds for both in-place and look-forward cash flows. Traditional lending sources, including banks, life-insurance companies, and CMBS lenders, are becoming increasingly active. Additionally, some of the cash raised to pursue distressed opportunities that never really materialized has made its way into debt strategies in the form of bridge loans.
These short-term loans provide the necessary leverage for acquisitions of transitional, non-stabilized assets. On the other hand, obtaining construction loans for new development continues to be challenging. Facing the lower probability of getting projects off the ground, many investors turn their focus to acquiring existing assets, which in turn increases the size of the buyer pool.