With the strength of the U.S. economy, hotel transaction activity should remain strong in the near term; however, as we look further out, things become a little less optimistic. Before we discuss the future, let’s take a quick dive into what happened in the past
As expected, hotel transaction volume fell to a historic low during the peak of the Great Recession in late 2009, a drop that began roughly 24 months earlier at the end of 2007. Similar to the rebound in performance, transaction activity among economy hotels recovered rapidly, but soon declined as investors shifted their focus to midscale and upscale hotels, which recovered more slowly from the recession. The dynamic between limited-service and full-service hotels reflected a similar pattern, with limited-service proprieties experiencing a much faster recovery than their full-service counterparts. When digging deeper into the differences between limited-service and full-service transaction volume, which were nearly equal at the beginning of 2010, we notice a stark difference over the last decade.
While the transaction volume for full-service hotels was three times higher in Q4 2019 than it was in Q4 2009, transaction volume among limited-service hotels was more than seven times higher over the same period. Some of this difference can be attributed to the number of limited-service hotels in the country far exceeding the number of full-service hotels, but it also represents a shift in investor sentiment that will continue to have an impact on transaction activity in the future. With comparatively few full-service hotels constructed in recent years, many of the existing full-service hotels exceeding 10 or 20 years in age, and the lower margins that are inherent with operating a full-service hotel, the potential upside for a buyer is significantly less than it would be for a well-positioned limited-service asset. The substantial increase in limited-service hotel transaction also follows the trend of what has been built over the last decade, what new brands have been introduced by the major hotel chains, and the types of assets that travelers have been seeking in recent years. Overall, since the Great Recession, transaction volume has followed a generally positive trend but has remained well below the peak, which was realized in 2007.
Economy, Midscale, and Upscale Number of Transactions
Looking forward to 2020, transaction activity is anticipated to remain strong in the first half of the year before slowing as the presidential election in November nears. With an influx of new supply opening in numerous markets in the coming months and the impact of rising labor costs, owners across the country may elect to sell while still benefiting from a strong trailing-twelve-month statement. In the first half of the year, private equity funds may also begin to deploy capital that they have been stockpiling in preparation for a possible recession that has yet to come to fruition. Lastly, rising construction costs are now causing developments that have not yet broken ground to no longer be feasible, and owners could turn to acquiring an existing hotel instead of trying to build a new property while also benefiting from the currently low interest rates.
In conclusion, expect a strong first half of the year in terms of transaction volume but taper expectations during the second half of 2020. Our HVS Brokerage & Advisory team is available to assist any asset-, debt-, or equity-related decision you need to make.