A reasonable amount of volatility can stimulate hospitality transactions, but no one enjoyed the swift-in-succession roadblocks to dealmaking that we experienced over the past several years.
First came the pandemic. Though an unprecedented event in most all our lifetimes, the experiences borne out of the 2007-2008 Great Recession helped owners, investors and lenders develop workable strategies that kept solvent as many properties as possible. Fortunately, the severe distress that many feared in the earliest dire days of the pandemic didn’t materialize. It also helped that preceding the pandemic, the hospitality industry had enjoyed a solid stretch of excellent-to-outstanding RevPAR growth, operating profitability and property valuation.
Regardless, the chilling effect on transactions was clearly felt. According to the recently released Global Hotel Investment Outlook 2024 from JLL, global transaction volume had steadily risen from $54.2 billion in 2013 to $77.8 billion in 2019, before slumping by more than half to $31.9 billion in 2020.
Global transaction volumes rebounded in 2021 and 2022 to about $73.0 billion, according to JLL, but inflation and rapidly rising interest rates quickly nipped the resurgence in the bud, with transaction volumes descending to $50.5 billion in 2023. And didn’t it seem like the bulk of transactions here in the U.S. in 2023 were mandatory refinancing of maturing loans? Lest we forget, U.S. 10-year Treasuries leaped from 0.67% in April 2020 to a peak of 5% by mid-October 2023.
SHIFTING PROSPECTS
Hospitality remains one of the most stable and attractive commercial real estate sectors, with many entities, from family offices and high-net-worth investor funds to institutional equity, anxious to deploy assets into the sector. But what will break the transaction logjam and restore more normal market dynamics? Clearly, a tempering of interest rates, which the Federal Reserve has indicated should be in the cards for this coming year, as well as continued strength in the U.S. economy, which was reported at 3.3% growth in GDP at year-end 2023, well above Wall Street projections.
Within this overall prospect for renewed transaction activity, we do see some shifting prospects, as well as familiar refrains. On one hand, it is getting harder to underwrite many of the drive-to resort markets that, somewhat paradoxically, flourished during the pandemic and immediately afterwards. As our living patterns readjust, performance and asset valuation are trending down for some of these properties.
However, group business was strong in 2023 and doesn’t appear to be slowing. This normalization between leisure and group/corporate travel should also help with occupancy, valuation and marketability of big-box hotels in some of our more distressed major urban markets. Business travel has also rebounded, and the impact of a new hybrid work model could push more of this price-insensitive demand to just three days a week—Tuesday, Wednesday, and Thursday— creating compression and the ability to push rates. On top of that, hotel closures and regulations on home sharing are positively impacting pricing dynamics in major urban markets.
MARKET DIFFERENTIATION
In the world of hotel development, as to the Lodging Econometrics Q4 2023 U.S. Construction Pipeline Trend Report, construction pipelines remain robust in several key markets, while New York City has the greatest number of projects under construction with 44 projects representing more than 7,300 rooms. Other markets with the most ambitious construction pipelines following Dallas include Atlanta, Nashville, Atlanta, Phoenix, and the Inland Empire of Southern California. Though not every project in the development pipeline comes to fruition, this is a reasonable indication of where major developers continue to favor investment.
On the other hand, we know that major urban markets, such as San Francisco, Chicago and Portland, remain challenged by post-pandemic social and economic reverberations and declining valuations. This may set contrarian investments in play, prompted by impending loan maturities. In such cases, owners may seek to avoid foreclosures by drastically reducing ask prices or working through auction sales.
In addition to pending loan maturities, many owners nationwide will be unable to make up for deferred CapEx expenditures, including funds deployed to keep properties solvent during the pandemic, another factor driving sales.
Last, investment “congestion” in major pipeline markets or high growth locales in states like Florida may prompt investors to more closely investigate other markets. Possibilities include cities like Detroit, already enjoying a robust boutique hotel market, where a new 600-room hotel adjacent to the downtown convention center has been recently announced; supra-Texas locations, such as Tulsa and Oklahoma City; smaller markets with potent governmental presence and excellent livability quotients, like Huntsville, Ala.; or nearby to already booming markets, think Austin and Nashville.
Overall, even with frustrated capital jumping up and down on the sidelines, and a softening of interest rates and continued strength in the U.S. economy, especially with respect to the global picture, deal volume should rebound in 2024. It’s a sense of normalcy we all need— buyers, sellers, brokers and lenders, alike.
Story contributed by Evan Hurd, principal & managing director, RobertDouglas.