Despite strong hotel investment levels in recent years, widening capital market dislocation wedged by the banking turmoil has slowed momentum in Q1 2023. A lack of portfolio and larger trades due to debt market volatility resulted in overall declines in hotel investment volume relative to the two prior years. However, Q1 investment volume remains in-line with pre-Covid averages given that the last two years experienced outsized hotel liquidity. Moreover, the number of single-asset trades reached the second-highest amount in history, driven by smaller cheque-size deals. While transaction activity in Q2 2023 is expected to be subdued akin to Q1, the hotel industry remains attractive among investors, particularly for luxury and select-service hotels with renewed optimism for urban markets.
An Opportune Time to Invest
U.S. hotels have demonstrated resilience in the face of recent economic challenges, such as increasing interest rates, inflation and geopolitical volatility evidenced by Q1 2023 RevPAR exceeding 2019 levels by 13%, propelled by robust leisure travel and resurfacing business and group demand. Resultantly, the outlook for hotel investment over the medium-term is optimistic with multiple catalysts on the horizon to drive further opportunities for acquisitions, including owners feeling financial pressure from rising CapEx needs, $100 billion in impending loan maturities in 2023 alone and interest rate cap renewals. Moreover, private equity funds will need to dispose of $4.8 billion in remaining assets reaching fund-life expiration over the next four years. Expect investment to pick up in response, mainly in the back-half of 2023 with a significant amount of dry powder on hand, as evidenced by Blackstone’s recent announcement of its largest-ever real estate fund of $30.4 billion, which includes an allocation for the hotel industry.
Juxtaposition of Asset Composition with Renewed Optimism for Urban Markets
Hotel assets on opposite ends of the spectrum have emerged as most appealing for investors: irreplaceable luxury hotels and select-service assets. Investors have been gravitating toward these high-conviction assets due to their strong performance and positive, long-term growth catalysts. Select-service hotels have historically been differentiated by their resilience to economic disruptions, evolved and diverse traveler base and strong operating performance. Moreover, investors face less of a challenge in closing smaller-cheque size deals amid heightened volatility in the debt markets. Resultantly, in Q1 2023, select-service hotels represented the highest proportion of total single-asset hotel trades at 84%. On the other side of the spectrum, investors are also gravitating toward luxury hotels. This segment has commanded elevated rates post-Covid in tandem with strong luxury demand stemming from growing wealth around the world. It’s no surprise that Q1 2023 observed record-high pricing in full-service hotels, driven by two $1-million-plus-per-key transactions and elevated luxury hotel liquidity.
Investors are also increasingly attracted to urban markets that offer long-term asset value preservation with a diverse demand mix and long-term consistency in performance, such as New York, Washington D.C., and Boston. In Q1 2023, all market types showed a full recovery compared to 2019, with urban markets showing the largest year-over-year growth. The improvement in urban hotel performance, coupled with discounted pricing (average price per key down 10.5% from 2019 levels in Q1 2023), has translated to a renewed investor optimism in these markets. With expectations for a further surge in group and corporate demand along with the resumption international travel, following China’s reopening of its international borders, this long-term growth opportunity is likely to result in an uptrend in urban hotel liquidity over the medium-term.
Final Thoughts
The U.S. hotel industry has shown remarkable resilience in the face of numerous challenges that have arisen in the past few years, with RevPAR expected to remain above 2019 as leisure demand remains robust, group and corporate reemerge and international demand begins to return. The industry has continued to attract investment dollars, with near record-breaking levels in 2021 and 2022. While investment momentum slowed in Q1 2023, it remains relatively in line with pre-Covid averages. Investors are gravitating toward luxury and select-service hotels with renewed optimism for urban markets, which are expected to continue to be an attractive investment opportunity for the foreseeable future.
Story contributed by Ophelia Makis, Sr. Analyst, Americas Hotels Research at JLL Hotels & Hospitality Group