Finance & DevelopmentHotel Transaction Downtrend: Interest Rates Played Major Role in Soft 2023 U.S....

Hotel Transaction Downtrend: Interest Rates Played Major Role in Soft 2023 U.S. Market

The “higher-for-longer” interest rate environment had a chilling impact on the U.S. hotel transaction market in 2023. After a strong 2022, only $22 billion in assets were traded between January and mid-December 2023. For comparison, the last time sales were under $30 billion was in 2013. While total transaction volume was down year over year, significant sales were made in key markets across the United States, according to CoStar data.

The top-performing market in terms of total sale price was New York City, with a volume of more than $2.1 billion. Most notably, the sale of the Park Lane Hotel to the Qatar Investment Authority for $622 million and the sale of a portion of the Mandarin Oriental New York to Reliance Industries for $215 million pointed to a healthy transaction market. The market boasted 33 sales in 2023 through mid-December, which is no surprise given the rate of recovery post-pandemic and continued ADR growth in the city. With new ordinances making development more difficult, the change in short-term rental regulations, and 16,000 rooms taken out of inventory to house refugees, new supply in the market will likely not be an issue once current projects in the pipeline open. A combination of these factors will likely make New York City an attractive market for buyers moving forward. As of mid-December, the market had 96 hotels and 19,649 rooms in the pipeline, with 57 of those hotels (8,732 rooms) in construction.

Second on the list of top markets by transaction volume was Fort Lauderdale, which saw the second-highest sale of the year in the United States—the Diplomat Beach Resort for $835 million to Trinity Investment. That transaction accounted for 80 percent of the market’s total sales volume of $1.05 billion and represented the highest sale price and highest price per key ever recorded in the market. Trades throughout 2023 have averaged $53 million, but the average was greatly skewed by the sale of the Diplomat in February. Excluding that transaction, trades in 2023 have consisted of limited-service properties averaging about $11 million. The high cost of debt may have shifted sales toward lower price points, as 2023 pricing (excluding the Diplomat) has been below the 2022 average of $14 million.

Phoenix saw three hotels trade for over $100 million each, two of those sales occurring in July (the DoubleTree Resort by Hilton Hotel Paradise for $115 million to the Global Hospitality Investment Group) and September (the Canopy by Hilton Scottsdale Old Town to Dynamic City Capital for $101 million), which were noteworthy as interest rates were already elevated. The market has piqued the interest of investors due to its hosting of demand-generating events, most notably Super Bowl LVII and the upcoming NCAA Men’s Final Four. Economic development has also added attractiveness to Phoenix, as the Taiwan Semiconductor Manufacturing Co. factory begins commercial operation in 2024. Continued economic expansion in the market will be an added benefit to hoteliers.

The $800 million sale of the JW Marriott San Antonio Hill Country Resort helped the San Antonio market reach the top five list of most active markets, a good example of how investors remain positive on both the San Antonio and Austin markets for value and expected growth. San Antonio’s solid economy remains attractive to investors looking for value.

The three most expensive sales of the year, including the partial ownership acquisition of The Bellagio in Las Vegas, were in the luxury/upper upscale classes. Luxury hotels performed well over the last two years and during the era of “revenge travel,” and transactions that break the $1 million per key mark are now a lot more common than pre-pandemic, speaking to the attractiveness of high-end hotels to investors.

Overall, higher interest rates and constricted lending have limited the number of transactions, which made it difficult for deals to happen. While there were over 3,500 disclosed hotel transactions in 2023, we expect to see activity pick up once the Federal Reserve drops interest rates, which in turn is expected to unlock capital that so far has remained on the sidelines.

Daryl Cronk, Emmy Hise, Jan Freitag, and Colin Sherman
Daryl Cronk, Emmy Hise, Jan Freitag, and Colin Sherman
Daryl Cronk, Emmy Hise, Jan Freitag, and Colin Sherman are on the CoStar Hospitality Market Analytics Team.