Heading into a new year, the U.S. commercial real estate industry finds itself in choppy waters amid fears of a recession, rising inflation, and interest rate hikes as market participants await a course correction. Challenges during 2022 including continued supply chain constraints, increasing labor costs and struggles in attracting talent are anticipated to endure through 2023. Combined with international and domestic geopolitical issues and market volatility, many believe during the near term, the U.S will experience a mild to moderate economic recession. Although inflation appears to have recently stabilized, it remains above seven percent, and the Federal Reserve has made clear its intent to continue raising rates until it sees a marked reduction in inflation nearer to its two percent target. Weakening fundamentals and higher cost of capital are anticipated to generally lower asset values. The good news is that for the most part, corporate finances are in good shape and having learned a lesson during the pandemic, employers will avoid extreme layoffs to avoid losing employees in a tight labor market. While consumer confidence is highly subdued, average household debt is low compared with the onset of prior recessions. Many anticipate that inflation will be significantly lower by the second half of 2023, setting the stage for falling interest rates and the beginning of a new cycle.
Recently the U.S. commercial property sector was spooked as two of the nation’s largest nontraded real estate investment trusts, namely the $69 billion Blackstone Real Estate Income Trust (BREIT) and the nearly $15 billion Starwood Real Estate Income Trust (SREIT), separately announced a limitation on withdrawals due to a surge in investor redemption requests that breached each REITs quarterly repurchase limit. Although hospitality investments represent a small portion of each vehicle’s portfolio, many perceive the rush of investors seeking to liquefy assets as an ominous sign of developing economic headwinds.
New lodging construction is relatively muted due to a continued reduced inflow of new projects as compared to pre-COVID levels. Above average inflation, rising interest rates, labor, and material shortages, as well as price increases will continue to be key factors in decision-making for developers during the near term. 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. Although overall hotel demand remains below pre-pandemic levels, largely due to strong room rate growth, key U.S. hotel industry performance indicators have consistently exceeded 2019 levels since March 2022. Leisure travel and, more recently, group and inbound international travel have led the recovery, while transient business travel continues to lag. A slowing economy is anticipated to reduce the rate of RevPAR growth which when combined with rapidly increasing operating costs, in particular labor, will place negative pressure on profit margins. The good news is that the airline industry anticipates the post pandemic travel rebound to continue to maintain momentum during 2023.
Lodging fundamentals continue to improve, with leisure-oriented hotels and submarkets consistently exceeding 2019 RevPAR levels while full-service, group-oriented hotels located in urban markets which had been slower to recover are beginning to exhibit outsized performance. China’s most recent reopening of it borders will be a boon to increasing numbers of inbound overseas travelers to the U.S. Inflation and a dimming economic outlook could begin to weigh on travel although RevPAR growth is anticipated to remain positive due in part to the sector continuing to maintain post pandemic rate integrity and remote and hybrid work trends driving new travel demand.
The LW Hospitality Advisors (LWHA) Q4 2022 Major U.S. Hotel Sales Survey included 105 sales that totaled just over $4.0 billion and included approximately 15,100 hotel rooms with an average sale price per room of $268,000. Trophy lodging assets appear to be agnostic to noisy headlines as very strong pricing has been realized for three hotels that were part of the former Strategic Hotels & Resorts Inc. portfolio, which most recently were controlled by the Chinese insurance firm Dajia Insurance Group Co., Ltd., the successor entity of Anbang Insurance Group Co., Ltd. The Q4 2022 trades included:
- Braemar Hotels & Resorts acquisition of the 210-unit Four Seasons Resort Scottsdale at Troon North in Scottsdale, AZ $267.8 million, or $1.275 million per key,
- Host Hotels & Resorts, Inc. purchase of the 125-unit Four Seasons Resort Jackson Hole in Jackson Hole, WY sold in an all-cash transaction for $315 million, or $2.52 million per key, and
- Fertitta MLB Owner, LLC buy of the 260-unit Montage Laguna, California for $650 million or $2.5 million per key.
Additionally, GD Holdings LLC closed on a forward sale of the brand new 235 unit Four Seasons Nashville, Nashville, TN which sold on a pre-construction basis for $165 million or $702,000 per key. It is rumored that if this Four Seasons Nashville were to be marketed for sale today, it would trade at a significantly higher price per key than the recently completed W Hotel Nashville, Tennessee, which sold for $950,000 per key at its opening based upon a forward acquisition commitment. These four headline transactions distort the Q4 2022 transaction data. Net of these trades adjusted metrics for the LWHA Q4 2022 Major U.S. Hotel Sales Survey included: 101 sales that totaled roughly $2.8 billion and included approximately 14,500 hotel rooms with an average sale price per room of $194,000. By comparison, the LWHA Q4 2021 Major U.S. Hotel Sales Survey (net of the sale of The Mirage in Las Vegas) included 126 sales that totaled nearly $8.1 billion and included approximately 23,100 hotel rooms with an average sale price per room of $350,000. By further comparison the LWHA Q4 2020 Major U.S. Hotel Sales Survey included 32 single asset sale transactions over $10 million that totaled $2.3 billion and included approximately 7,700 hotel rooms with an average sale price per room of $295,000. By further comparison, the LWHA Q4 2019 Major U.S. Hotel Sales Survey (net of the sales of Bellagio Hotel & Casino and Circus Circus Hotel & Resort, both in Las Vegas) identified 52 sales that totaled nearly $3.95 billion and included approximately 12,200 hotel rooms with an average sale price per room of $323,000.
Comparing adjusted Q4 2022 with adjusted Q4 2021, the number of trades decreased approximately 20 percent while total dollar volume decreased roughly 65 percent and sale price per room decreased by roughly 44 percent. Comparing Q4 2022 with Q4 2019, the number of trades increased by approximately 94 percent while total dollar volume decreased roughly 29 percent and sale price per room decreased by roughly 40 percent.
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 sale price per room of $253,000. For the year 2021, the LWHA Major U.S. Hotel Sales Survey includes 308 single asset sale transactions over $10 million, totaling more than $36.2 billion and included approximately 84,200 hotel rooms with an average sale price per room of $431,000. For the year 2020, the LWHA Major U.S. Hotel Sales Survey included 79 single asset sale transactions over $10 million totaling $5.3 billion and included approximately 19,400 hotel rooms with an average sale price per room of $273,000. By further comparison, the LWHA 2019 Major U.S. Hotel Sales Survey identified 164 transactions totaling roughly $17.7 billion including 48,800 hotel rooms with an average sale price per room of $364,000.
Coming off one of the worst trading years in U.S. history in 2020, the number of trades for 2021 increased by approximately 290 percent while total dollar volume increased roughly 580 percent and sales price per room increased by roughly 58 percent. Comparing 2022 with 2021, the number of trades increased by approximately 56 percent while total dollar volume decreased roughly 45 percent and sale price per room declined approximately 41 percent. Finally comparing 2022 with 2019, the number of trades nearly tripled while total dollar volume increased roughly 12 percent and sale price per room declined roughly 31 percent
Additional newsworthy Q4 2022 observations include:
- Forty-Four trades or roughly forty three percent of the national Q4 total occurred in California and Florida.
- Two hotels traded over $2.0 million per unit each, and three sales occurred over $1.0 million per room each
- One Q4 2022 sale (Montage Laguna Beach) was consummated for $650 million, and another (Four Seasons Resort Jackson Hole) sold for over $315 million.
- Two Q4 2022 sales (Four Seasons Resort Scottsdale at Troon North and Sirata Beach Resort St. Pete Beach, FL) were consummated for between $200 million and $299 million each.
- Two additional Q4 2022 sales (Four Seasons Hotel Nashville and Charter Hotel Seattle) sold for between $100 million and $199 million each.
Institutional investment platforms, many of whom are lodging centric, continue to be active in the hotel acquisition arena. Examples include American Liberty Hospitality, Banyan Investment Group, Bluegreen Vacations Holding Corporation, Braemar Hotels & Resorts, BRE Hotels & Resorts LLC, Crescent Real Estate, DiamondRock Hospitality Company, Drury Development Corporation, Fertitta Entertainment, Inc., Host Hotels & Resorts, Inc., KHP Capital Partners, Linchris Hotel Corporation, Monarch Alternative Capital, MCR, McWhinney, Ocean Properties Ltd., Opterra Capital, Peachtree Hotel Group, RADCO Companies, Tamarack Capital Partners, Stonebridge Companies, The St. Joe Company, and Trinity Investments.
The recent dramatic rise in financing costs has widened bid/ask spreads and slowed investment volume. During 2023 refinancing challenges will occur as many maturing 5- and 10-year term loans that were originated in 2013 and 2018 at much lower debt rates will be coming due. Even in the best-case scenarios where properties have retained value, due to higher interest rates. debt service coverage ratios will be lower at refinancing requiring some to inject fresh equity to right-size their loan(s). With pandemic related forbearance in the rear-view mirror, lenders are anticipated to be more aggressive to enforce default remedies including foreclose. Many investors are holding on to dry powder, slowing down acquisitions and waiting for distress to bake in during 2023. With more than $9.8 billion in lodging CMBS loans maturing in 2023 acquisition opportunities particularly in the full-service segment will evolve. An enormous amount of capital was raised in anticipation of pandemic related distress opportunities that never materialized. As such, pricing for compelling investment opportunities will be bid up resulting in stress induced transactions that may not reflect discounted valuations.
Daniel H. Lesser is president and CEO of LW Hospitality Advisors LLC
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