Despite the expectation of prolonged economic uncertainty and geopolitical headwinds in 2024, U.S. hotel performance is forecasted to remain above pre-pandemic levels and provide a favorable backdrop for hotel investors. On the demand side, leisure travel will gradually normalize amidst increased outbound travel options. Conversely, group, business and international travel will continue to reemerge as return-to-office mandates grow and consumers prioritize spending on travel. This will underpin a boost in performance for U.S. urban markets, including New York, Boston, Chicago and San Francisco, among others.
Rates will also remain elevated through 2024; however, there are signs of ADR growth slowing down due to pricing fatigue. Since April 2023, trailing-12-month ADR has consistently grown less than 1%, month-over-month. Nevertheless, the U.S. hotel industry is expected to deliver robust performance in 2024, with year-end RevPAR forecasted to be up 18.1% from 2019. Look for urban markets to lead the way and attract increased investment, with major markets, such as Chicago, Los Angeles and New York City, to drive transaction activity.
Optimism Abounds
Even though 2023 witnessed the second-highest number of hotel transactions on record, the prevailing high cost of debt resulted in the lowest level of transaction volume in 10 years (excluding 2020). Portfolio volume contracted to an unprecedentedly low level, comparable only to the two previous event crises of COVID-19 and the Great Financial Crisis (GFC). Additionally, the average deal size plummeted to its lowest point since the GFC, reaching just $31 million. This decline in portfolio volume and average deal price reflects the challenge investors face in financing larger deals. However, this sentiment is expected to pivot in 2024. In the latest Federal Reserve meeting in December, its monetary policy view turned accommodative, with a new consensus that they will cut rates earlier and faster in 2024. This shift will likely encourage hotel investors to be more acquisitive. According to our latest Global Hotel Investor Sentiment Survey, 81% of investors are expected to be net buyers in 2024, the highest total ever recorded since the inception of the annual survey in 2001. This positive investor outlook bodes well for the U.S. hotel investment market as the challenge of capital market dislocation will begin to ease. Expect investment activity to accelerate over the next 12 months.
Multiple Catalysts to Spur Activity
Investors should look forward to increased opportunities to purchase assets where the owners need relief from financial pressures. These pressures include the inability to refinance impending loan maturities, depleted CapEx reserves in the face of mounting PIP requirements and impending high-interest-rate cap renewals. By 2026, $51.8 billion in hotel securitized debt is anticipated to mature. Further opportunities will arise from the need of private equity funds to sell their assets as they reach their fund-life expirations. Over the next four years, $11.2 billion in U.S. hotel closed-end funds are expected to reach the exit stage of their lifespan. Look for these stress points to spur some dispositions over the medium term.
What Investors Want
Two sectors on opposite ends of the spectrum have emerged as the most appealing and liquid for U.S. hotel investors: irreplaceable luxury assets and select-service and extended-stay hotels. With global wealth continuing to rise over the long-term, as well as the growing appeal for unique travel experiences, luxury hotels are anticipated to remain the most favored among investors in 2024, particularly those who are less reliant on leverage. The increased demand for irreplaceable luxury assets has spurred a notable rise in luxury hotel liquidity post-pandemic. In 2023, the number of single-asset luxury hotel transactions reached the third highest level in the past seven years, totaling 39.
On the other side of the spectrum, select-service and extended-stay hotel liquidity has grown significantly since the pandemic. In 2023, the sector accounted for 52.5% of U.S. hotel liquidity, the highest portion in history. Investors will continue to gravitate toward the sector due to its smaller check sizes, strong operating performance and growing yields. Expect this juxtaposition of acquisition composition to persist through 2024 and beyond.
Final Thoughts
The U.S. hotel industry is expected to deliver robust performance in 2024, with urban markets leading the way. This supports the increased optimism for accelerated hotel investment activity over the next 12 months as capital market dislocation eases, reflected in a positive investor sentiment and an accommodative signal from the Federal Reserve to lower interest rates next year earlier and faster. Financial pressures and dispositions stemming from expiring private equity funds’ life cycles will also create opportunities for investors to acquire assets. U.S. hotel investment is poised to rebound, with a focus on luxury and select-service and extended-stay hotel assets in top urban markets. Collectively, these factors signal a positive outlook for accelerated U.S. hotel investment in 2024.
Story contributed by Ophelia Makis, sr. analyst, Americas Hotels Research, JLL Hotels & Hospitality Group