Hotel occupancy and RevPar hit a record high in 2023 and grew 2.0 percent in the first quarter of 2024. However, RevPAR is forecast to grow by 3.0 percent for the remainder of the year due to an increase in inbound foreign travelers, group meeting events, and increasing demand by leisure domestic travelers, achieving a nominal record of $101.20, which is 115 percent of 2019 pre-pandemic levels, according to the latest CBRE report. This outlook is based on a projected average daily rate (ADR) growth of 1.7 percent and a 0.2 percent increase in occupancy.
In fact, several U.S. markets ended last year with RevPAR well above 2019 levels, in particular New York City, where strong leisure and global appeal, along with Airbnb restrictions, pushed room rents to record highs. San Diego also is a top post-COVID performer, with a healthy mix of group meeting business and leisure travel.
Performance, however, may be tempered by the high number of new hotels scheduled for completion in 2024, as well as competition from demand for alternative lodging sources, like cruise ships and short-term rentals. According to Co-Star, 200 new hotels with 24,116 rooms are scheduled to open this year, a 37 percent increase compared to 145 in 2023.
Michael Selinger, senior manager in Strategy and Transactions at EY, noted, however, that new supply is concentrated in three key regions, comprising more than 50 percent of the new room count: the Pacific, Mountain, and South Atlantic regions, particularly California and Florida due to their enduring popularity among both leisure and business travelers.
But despite rosy hospitality activity, the rise in U.S. interest rates dampened hotel investment activity considerably, with sales volume dropping from $52 billion in 2022 to just $24 billion last year, according to CoStar. Sachin Avadhani, EY Americas Hospitality Sector Leader, also noted that hotel transaction volume dipped to just over $3 billion in the first quarter of 2024, marking a nearly 50 percent decrease in sales volume compared to the same period in 2023.
It wasn’t all bad news for hotel investment in 2023, as U.S. transaction volume was significant in certain regions and urban centers. “New York City, in particular, recorded its highest hotel transaction volume since 2016, reaching $3.3 billion,” said Avadhani, noting that this surge was driven by strong performance metrics in this market.
The bid-ask spread between buyers and owners due to the higher cost of debt also limited transactional activity, said Washington, DC-based Tom Rowley, executive managing director and the U.S. Practice Lead for the Hospitality and Leisure practice group at Cushman and Wakefield’s Valuation and Advisory services.
The debt situation put cash buyers in more favorable position, he added, but noted that with substantial growth in average daily rate (ADR) over the past several years, pricing has remained strong in most markets.
“Acquisitions are not at a standstill, but it certainly is a slow walk,” Rowley continued. “As noted, the cost of capital has kept many buyers sidelined or unable to close the gap with the seller.” However, he cited some notable recent transactions.
- Sale of the 234-room AC Hotel by Marriott Washington DC Convention Center to Richmond-based Apple Hospitality REIT Inc. for nearly $117 million.
- Acquisition of the 630-room Hyatt Regency San Antonio Riverwalk by California-based Sunstone Hotel Investors, Inc.
- Acquisition of the 215-room 1 Hotel Nashville and 506-room Embassy Suites by Hilton Nashville Downtown for $530 million in an all-cash deal by Maryland-based Host Hotels & Resorts,
- Sale of the 390-key Hilton Boston Back Bay to a partnership of New York-based Cetares Management and California-based Belcourt Capital Partners, with debt from Blackstone.
- Sale of the 705-key Arizona Biltmore in Phoenix by Blackstone to London-based investor Henderson Park for $705 million.
The CBRE report forecasted a short-term interest rate decline by 100 bps in 2024, which would boost hotel sales volume. It also suggested that investors will favor trophy assets and boutique hotels in supply-constrained, differentiated locations, as well as group hotels with leisure appeal and newly renovated, branded, select-service hotels in markets with strong demand growth against the lingering uncertainties in the broader economic and geopolitical landscape.
Upscale hotel assets are of particular interest to investors, as the luxury and upscale sectors are experiencing outperformance, with RevPAR is forecasted to increase in 2024 by 3.8 percent and 3.7 percent year-over-year, respectively, according to CBRE.
Based on discussions with industry stakeholders, including lenders, owners and brokers, Avadhani said that deal activity is expected to pick up in the second quarter, buoyed by substantial allocation of capital to hotel assets, particularly on the luxury side of the market.
He contended that top urban markets will experience the biggest comeback, especially in luxury accommodations, select-service and extended-stay assets.
Rowley concurred, noting that financial markets are already improving, with debt funds, insurance companies and CMBS lending more active today than previously, particularly for stabilized hotel assets with a good story and sponsor.
“Investors are optimistic but remain cautious, balancing the potential for growth against the lingering uncertainties in the broader economic and geopolitical landscape,” added Alex Gregoire, senior manager in Strategy and Transactions at EY. “The deceleration of inflation and the receding fears of a recession are contributing to a more favorable investment climate,” she continued, noting that increased lender interest and modest improvements in interest rates and debt coverage ratios suggest a healthier financing environment for hotel projects.
Meanwhile, impending loan maturities may compel owners to consider selling assets, as they grapple with the high cost of refinancing, said Rowley. “No one area has seen a wave of default or discounted sales, but as debt maturities continue to move closer sellers will be faced with either a refinancing at a rate that is well above their in-place debt or bringing the property to market,“ he explained.
Citing a recent Trepp report, Selinger noted that the lodging sector is experiencing significant distress, with CMBS delinquencies at 5.9 percent—second only to office at 7.38 percent—and special servicing at 7.40 percent. He also said that rising cap rates, driven by a higher interest rate environment, have further complicated refinancings in this sector, as GreenStreet has reported valuations approximately 5.0 percent lower than recent highs.
Valuation uncertainty is further exacerbated by a lack of transactions in the market in recent times for comparative pricing, Selinger added, explaining that continued inflation, which is negatively impacting consumer spending and savings, is complicating hotel demand projections and underwriting by reducing NOI and making refinancing options less attractive.
The wave of distressed sales many believed would come about, however, has not materialized, noted Rowley. “There have been several instances where the borrower has given back the property to the lender due to constrained capital, lack of belief in a recovery in that specific market or other capital/operational cost strains,” he said, but noted that lenders so far have mostly been agreeable to working with borrowers to find a solution that is best for the asset’s outcome.
If the sponsor and the lender have a good relationship and the hotel has a good story with stable or trending demand, Rowley said that there is a good chance the deal will get done, albeit at a higher than previous rate.
Gregoire suggested that lenders are willing to work with borrowers because hotels are operationally intensive and, therefore, unattractive assets for repossession. She said that some borrowers are choosing to restructure their capital stacks, introducing preferred equity tranches, thus reducing the outstanding debt balance and wiping out their equity in the investment. Others are pursuing short-term extensions, of which a significant amount will come due in late 2024 or early 2025.
Rowley noted that the later method is preferred right now, as most borrowers with maturing loans are choosing to postpone debt maturity— kick the can down the road, with the hope of lower rates in the near term.
“However, lenders can only extend and pretend for so long,” warned Gregoire, noting that distressed/foreclosure sales have been observed, primarily driven by an intention to pay down deferred debt.