Hotel Executives Say Transaction Environment Is Reaching Inflection Point

Article originally posted on CoStar on April 1, 2024

Getting a deal done for a hotel has been difficult over the past few years, with inflationary pressures and banking woes headlining the difficulties. That could start to change in the second half of 2024, hotel executives say.

During the “Market Overview: Financial Analysis + Forecast” panel at the 2024 Hunter Hotel Investment Conference, Kevin Davis, Americas CEO of JLL Hotels & Hospitality Group, said the next cycle of transactions is already underway, and there are several large transactions on the way soon.

The industry is reaching an inflection point, Davis said.

“On the surface, it appears like there’s not a lot going on in the market. But in fact, there are a lot of discussions taking place, a lot of transactions going on behind the scenes that I think will get announced over the next couple of quarters,” he said.

Bill Grice, president of CBRE, said transaction pace is already up about 30% compared to this time last year.

Although more deals are being realized, interest rates from lenders aren’t expected to decrease. Hunter Hotel Advisors President and CEO Teague Hunter said the cost of debt has been hovering around 7% to 8% — which is on par with some historical numbers, but more than what it was in recent memory.

“We’re just in a new norm today,” Hunter said. “Everyone keeps waiting to go back. ‘When are rates going to go down?’ That’s not happening.

“There’s a lot of activity right now. It’s not easy. It’s hard. There’s a bid-ask spread. But there’s a lot of activity, a lot of sellers, a lot of assets on the market. I think deals are getting done; they’re just hard to get done.”

Daniel Peek, president and chief operating officer of Atlanta-based real estate agency Hodges Ward Elliott, said the current rates are actually more standard than the lower rates of years past.

“You can finance a hotel today; it’s just a little more expensive than normal,” he said. “The norm is where we are and where we spent most of our career. The abnormal part was the Great Recession until 24 months ago.”

While getting a favorable loan has been harder to come by for hoteliers, lenders are generally more bullish on the hospitality industry than rival sectors, Davis said. This has driven competition and spread compression, and there could be more liquidity entering the space in the near future.

“There’s a lot of liquidity when lenders look at hospitality relative to other asset classes [such as] multifamily, industrial, certainly office, which has been redlined. They see a sector that is performing well,” Davis said. “It’s been a great inflation hedge and will continue to perform well.”

Those making large transactions over the next few quarters will be thinking about the profitability waiting for them in three to four years, not the current cost of debt, Grice said. The opportunity to make a deal like this could be closing soon.

“If there’s an asset that’s core to your portfolio that you have to own, now’s a great time to go after that asset,” he said. “That window is going to close, and if you wait for the Fed to start cutting rates, your opportunity to really seize upon the market dislocation that we’ve been going through the past 12 to 18 months is going to be out the door.”