At the dawn of 2024, a U.S. presidential election looms amidst numerous geopolitical challenges including two major ongoing wars in Europe and the Middle East which threaten global economic growth. The good news is, thus far it appears the U.S. economy has avoided recession with many now perceiving continued growth, albeit subdued. Inflation has cooled, the economy continues to add jobs, interest rates appear to have peaked and are anticipated to gradually decline for the next two years. Furthermore, a roaring stock market continues to fuel American consumer expenditures resulting in strong demand for travel including lodging.
Despite a resilient economy, 2023 was an about-face in the capital markets. Due to the swift and dramatic rise of interest rates, transactional market volumes have dramatically decreased. Bid/Ask spreads remain largely unsurmountable unless sellers are forced into a disposition or buyers are willing to trade at low capitalization rates despite higher borrowing costs.
Increased interest rates and inflation coupled with the persistence of remote and hybrid work arrangements have battered the U.S. commercial real estate sector, particularly the office market. Elevated vacancy rates and rising levels of loan delinquencies are challenging the ability of office building owners to refinance debt maturities, which has led to reduced asset pricing and distressed sales that impact the value of surrounding properties. Furthermore, a decline of foot traffic has had a compounding effect of reducing demand for restaurants and retail locations in numerous downtown urban cores.
In contrast and for the first time, the lodging sector has evolved into a preferred commercial real estate asset class due in part to the strong post-pandemic recovery. Hotels have proven to be resilient, and an inflation hedge as sophisticated revenue management allows for dynamic pricing of room rates on a continuous basis. This is a phenomenon that is highly desirable during a rising market, however, can be an Achilles heel in a declining environment. Despite raised interest rates, the lodging sector is generating strong profits and investment yield opportunities.
While national hotel occupancy and ADR are still increasing, albeit modestly, RevPAR growth is anticipated to taper in 2024. It is noteworthy that all hotel chain scales are anticipated to experience increasing RevPAR this year. The bad news is that on an inflation-adjusted basis, real RevPAR levels are not expected to return to 2019 levels until later in the decade. Additionally, rising operational costs are creating margin pressure for owners and operators.
New lodging construction is relatively muted due to a continued reduced inflow of new projects as compared to pre-COVID levels. Elevated inflation and interest rates, and high labor and material costs will continue to be key factors in decision-making for developers during the near term.
Throughout the nation, numerous hotels have closed and redeveloped into alternative uses including housing for migrants, senior housing, and shelter for homeless. Additionally, older physically and/or functionally obsolete hotels are being demolished to make way for new lodging construction and/or development of alternative use(s).
Combined with limited new supply, rebounding corporate and group travel, and new demand for lodging being induced by the hybrid work model, the sector is experiencing strong tailwinds while rising interest rates coupled with the dislocation in the credit markets have created headwinds.
The LW Hospitality Advisors (LWHA) Q4 2023 Major U.S. Hotel Sales Survey included 86 sales that totaled just over $3.0 billion and included approximately 13,900 hotel rooms with an average deal size of $35.4 million and an average sale price per room of $219,000. In comparison, the LWHA Q4 2022 Major U.S. Hotel Sales Survey included 107 sales that totaled nearly $4.1 billion and included approximately 15,300 hotel rooms with an average deal size of $38.1 million and an average sale price per room of $266,000. Comparing Q4 2023 with Q4 2022, the number of trades decreased approximately 20 percent while total dollar volume declined roughly 25 percent, average deal size dropped 7 percent and sale price per room diminished by roughly 18 percent.
For the year 2023, the LWHA Major U.S. Hotel Sales Survey includes 340 single asset sale transactions over $10 million. These transactions totaled just over $12.8 billion and included approximately 52,500 hotel rooms with an average deal size of $37.7 million and an average sale price per room of $245,000. In comparison, for the year 2022, the LWHA Major U.S. Hotel Sales Survey includes 481 single asset sale transactions over $10 million. These transactions totaled nearly $19.9 billion and included approximately 78,300 hotel rooms with an average deal size of $41.3 million and an average sale price per room of $253,000. Comparing 2023 with 2022, the number of trades decreased approximately 29 percent while total dollar volume declined roughly 35 percent, average deal size dropped close to 9 percent and sale price per room diminished by nearly 4 percent.
Newsworthy Q4 2023 observations include:
• Thirty-seven trades or roughly forty-three percent of the national Q4 2023 total occurred in Florida and California.
• Twenty-two major hotel sale transactions in the State of Florida represent a grand total of $530 million of investment activity.
• Fifteen major hotel sale transactions in the State of California represent $390 million of investment activity.
• Sunstone Hotel Investors (NYSE: SHO) sold to Mexico City-based Parks Hospitality Holdings the 1,060-room Boston Park Plaza (the “Hotel”) for $370 million, or approximately $350,000 per key. According to SHO, the sale price represented a 12.1x multiple on Hotel Adjusted EBITDAre and a 7.1% cap rate on Hotel Net Operating Income for the trailing four-quarter period ended June 30, 2023. The hotel, which is now branded the Hilton Boston Park Plaza, is managed by Hilton.
• Magna Hospitality acquired from McSam Hotel Group three hotels with a total of 567 rooms along Fifth Avenue in Midtown Manhattan for nearly $215 million or roughly $385,000 per room. The assets include the 230-room DoubleTree by Hilton New York Midtown Fifth Avenue, the 162-unit Hyatt Centric Midtown 5th Avenue New York, and the 165-room Le Meridien New York Fifth Avenue.
Two Q4 2023 sales were consummated for between $100 million and $199 million each.
• A joint venture between Apollo Global Management and Newbond Holdings acquired from Sherwood Equities the 317 key Renaissance New York Times Square Hotel at 2 Times Square for $165 million or nearly $521,000 per unit. Sherwood Equities purchased the land beneath the property in 1985 and developed the building in 1990.
• Tidal Real Estate Partners sold to Ohana Real Estate Investors the 196-room Hilton Brooklyn New York for $110 million or $561,000 per unit. The transaction reportedly included three retail condominiums and property tax incentives.
• Foley Entertainment Group purchased from Lat33 Capital the 69 key MacArthur Place Hotel & Spa in Sonoma, CA for $65.6 million or nearly $951,000 per unit.
• The 65-room Whitney Hotel Boston was sold by Related Fund Management to Netherlands-based Egeria Group for $57 million or nearly $877,000 per unit.
Institutional investment platforms, several of whom are lodging-centric, dominated the Q4 2023 hotel transaction arena.
• Examples of buyers include Apollo Global Management, Apple Hospitality REIT Inc., Crescent Real Estate LLC, Dauntless Capital Partners, EOS Investors, Highgate, Linchris Capital Partners, Magna Hospitality, Newbond Holdings, Noble Investment Group, Ohana Real Estate Investors, Parks Hospitality Holdings, and Shamin Hotels.
• Examples of sellers include Ashford Hospitality Trust, Inc., BRE Hotels & Resorts LLC, Flynn Properties, Inc., Hersha Hospitality Trust, Highgate, JBG Smith Properties, McSam Hotel Group, MCR Hotels, NewcrestImage, Peachtree Hotel Group, Pebblebrook Hotel Trust, Starwood Capital Group, Sunstone Hotel Investors, Inc., Taconic Partners, and Kohlberg Kravis Roberts & Co. L.P.
An interesting sale transaction not included in the LWHA Q4 2023 Major U.S. Hotel Sales Survey is RH (NYSE: RH) (furniture company formerly known as Restoration Hardware) acquisition of the 10-unit RH Guesthouse New York for $57.7 million. The seller, Delshah Capital filed for bankruptcy protection in October 2023, and as part of the deal to repay Israeli bondholders. The building, which was originally constructed in 1887, was leased to RH who reportedly invested $62 million to convert the former warehouse to a purpose-built luxury boutique lodging facility to enhance its unique reputation for exclusivity and quality. The building contains six 500 square-foot guestrooms, three two-story 1,000 square-foot suites, a full-floor 2,600-square-foot penthouse that is periodically available to be reserved, culinary offerings and a rooftop infinity pool. By acquiring the fee position in the asset, RH is no longer obligated to pay $3.7 million annually in rent. Given the buyer’s significant tenant improvement investment in the asset, this sale transaction is considered atypical.
Continued sluggishness in sale transaction volume underscores market strain due to elevated interest rates while blurring price discovery of assets. Bid-ask gaps remain as sellers have been desirous to transact on the heels of the post-COVID bump while institutional buyers underwrite more normalized performance. The 2024 transaction market will be driven materially higher as near-term debt maturities which originated during a much lower rate environment come due, and/or cash-strapped sponsors need for required capital investment funds. Owners forced to transact will align with the market’s new realities and this capitulation will become the harbinger of a pricing recalibration. A variety of financing sources, including new entrants, are actively lending in the hospitality sector. Furthermore, anticipated Federal Reserve interest rate cuts will spur narrowing of bid/ask spreads. Equity capital formation continues to occur which will compete with the significant amount of capital raised in anticipation of pandemic-related distress opportunities that never materialized. Enormous sums of “dry powder” will ultimately bid up pricing of compelling U.S. hotel investment opportunities resulting in stress-induced transactions that may not reflect discounted pricing. Valuations are anticipated to remain robust for top-tier properties with in-place cash flow while reduced pricing opportunities may only be available for complex and/or less desirable assets.