In the two years since the COVID-19 pandemic prompted shutdowns and a slowdown in business across the United States, hotel transaction volume has recovered significantly. According to JLL Hotels & Hospitality’s Hotel Investment Outlook released in early February 2022, the hotel industry saw a 131 percent increase in transaction volume worldwide in 2021 versus 2020, and the Americas reported an even greater surge in 2021—up 269 percent over the previous year and 32 percent over 2019. LODGING spoke with industry experts who expect this increased activity will continue in 2022 and shared the latest transaction trends that will help inform investors looking to buy or sell hotel assets in the current environment.
Subverted Expectations
From March through May 2020, U.S. hotel transactions dropped by 74 percent year-over-year, according to the Hotel Transaction Almanac produced by STR’s Consulting & Analytics office and CoStar Group. Deal activity didn’t begin picking up again until the third and fourth quarter of 2020. Kevin Mallory, global head and senior managing director, Hotel Brokerage & Investment Sales, CBRE, says that in the second half of 2020, “We started to see some liquidity-driven transactions primarily by REITs, taking high-quality product out to market to create liquidity for their balance sheets.”
Heading into 2021, investment activity climbed in the second quarter and accelerated throughout the year, which Mallory describes as “extremely robust and surprising.” For CBRE, he notes, this meant “a record transaction year—we were busier than we ever have been in the past 15 years.” That volume shows no signs of slowing in the months ahead. “As we enter 2022, it’s a robust environment. We’re taking a lot of product out to market. Owners continue to engage with us to determine what the values of their properties might be, and we have high levels of liquidity both in the debt and the equity markets with respect to the lodging sector,” Mallory says. “That liquidity, in many respects, is driving investor interest in the class.”
Kevin Davis, Americas CEO, JLL Hotels & Hospitality, confirmed that 2021 marked one of the strongest hotel transaction volume years in U.S. history. Investment volume reached $38.1 billion in the United States last year—the third-highest total ever, he says. “Despite some headwinds from rising interest rates and historic inflation, this positive momentum has carried into 2022 with preliminary January volume reaching $2.4 billion, an increase of 333 percent relative to January 2021.” He notes that January’s strong performance was partly driven by Summit Hotel Properties’ $776.5 million acquisition of a NewcrestImage portfolio totaling 27 hotels.
Davis says JLL anticipates increased mergers and acquisitions (M&A) and consolidation throughout 2022 that will drive transaction volume. “While inflation remains a concern, benchmark yields still remain historically low. Moreover, there has been an unprecedented amount of capital raised in the past 12-18 months, which should continue to propel transaction activity. JLL expects 2022 to be a banner year for U.S. hotel investment activity, with total volume likely to increase 25-30 percent compared to 2021.”
Steve Kirby, managing principal of Mumford Company, a full-service hospitality brokerage advisory firm, says that today, his firm is seeing strong buyer interest and has a solid deal pipeline—the best since 2019. “We have a good number of listings right now and are getting interest in pretty much everything. Everybody seems very bullish at this point.”
Kirby describes several factors behind the healthy appetite for deals that the hospitality space is witnessing today. Volatility in the stock market, for instance, is pushing more investors into real estate. “When you’re an individual or small, multi-property owner and you’ve got a stock portfolio worth $3-4 million, a thousand-point swing in the market means all of the sudden your portfolio is down by 20 percent and your cash available to invest has changed significantly,” Kirby explains.
Another reason for the recent pick-up in deal activity is the availability of capital from funds initially set aside and raised for the intended purpose of acquiring distressed assets. However, in reality, Kirby notes, “there just weren’t that many distressed assets out there, so all that money has now come into play.” Part of the reason the surge in distressed hotel listings didn’t pan out the way many in the industry anticipated is due to government initiatives such as the Paycheck Protection Program that kept many in business during the worst of the pandemic travel slowdowns. These programs also resulted in a speedier recovery for hotels in high-demand leisure markets. “People didn’t have to hit their reserves quite so much, so individual investors have cash available, and leisure markets have done so well that properties have thrown off a lot of cash that’s now available to be used.”
Mallory similarly highlights that the widespread pricing discounts the industry expected to see early in the pandemic did not come to fruition. “We haven’t seen a preponderance of distressed product in the marketplace; early on, we saw a couple of properties that needed to trade at discounts, and a couple in New York in 2020 traded at clear discounts to 2019 values. But for the most part, given the high degree of liquidity, both in the debt and the equity markets, we’ve seen pricing really pushed to match the potential for the property that’s being taken to market.”
The industry may yet see a trickle of distressed assets throughout the year, Kirby adds. “A lot of it has taken a long time to work its way through the legal system, and then some lenders, REO deals, and current owners have been holding assets waiting for a price peak,” Kirby explains.
In-Demand Assets
It’s no secret that demand for leisure travel has fueled the U.S. hotel recovery thus far, and as such, investors have clamored to scoop up assets in popular resort and vacation destinations. According to JLL Hotels & Hospitality’s Hotel Investment Outlook released in February 2022, assets in resort markets saw a 17 percent increase in sales activity in 2021 compared to 2019, while deal activity among assets in urban markets declined 22 percent last year versus the pre-pandemic comparable.
Mallory observes that while leisure and resort markets saw heightened demand in 2021, activity in large urban centers is starting to pick up in 2022. “Demand, particularly through 2021, really focused on the select-service segment of the market and on full-service and resort products located in the ‘smile states,’” which he describes as states through which one can draw a line from San Francisco south into Los Angeles, east across the country to Florida, and then north up the Eastern Seaboard into Washington, D.C. “That’s where most of the transaction activity had occurred in 2021 by volume.” At the start of 2022, Mallory notes that CBRE has been involved in several key transactions outside “smile state” markets, including the sale of the 1,220-room Sheraton Boston Hotel—“one of the first large convention center-oriented properties to trade in the marketplace since COVID-19,” he describes. CBRE was also involved in the recent sale of the Hyatt Place San Francisco Downtown, which, Mallory emphasizes, took place in “one of the harder-hit markets in the country” and marked “the first significant transaction to have occurred in that market since the middle of 2020.”
Looking ahead, Mallory expects to see markets that have been less active over the past two years—e.g., New York, Chicago, San Francisco, and Seattle—emerge at the forefront of high-volume hotel transaction activity. Likewise, he anticipates pickup in various segments within the hotel real estate sector, including full-service properties in Northern markets and assets that cater primarily to convention and group business.
From his perspective, Kirby notes that the type of investors and the assets they’re looking to acquire hasn’t changed much for his firm in 2022. “We’ve gotten interest from institutional investors, individuals, and regional players with anywhere from five to 15 assets in their portfolio already and select-service seems to be where most of the demand is,” Kirby explains, adding, “There’s a lot of debt and equity available right now, so we’re getting good prices for assets.”
However, evolving market conditions have led to some complicated pricing dynamics. Kirby questions whether properties in high-demand destinations that have outperformed their 2019 performance levels will continue to do so in the coming years. “One of the issues I’m having right now is that these assets performed so well over the last two years, it’s hard to determine whether that is going to be sustainable and whether the value on the metrics today will hold going forward,” he says. “I’ve got properties that are doubling what they did in 2019 in some leisure markets. It’s hard to believe that pace will continue over the next few years.”
In urban markets, Kirby says that investors have remained active and that pricing metrics and cap rates are higher on assets in these locations due to the uncertainty around the return of business travel. “Buyers are not scared of those urban markets, but they’re not willing to pay the price that they would if those markets were already healthy,” Kirby explains, adding that he expects a corporate travel comeback later this year, which could shift that dynamic. “We’ve seen some positive activity on the group front. Assuming no new variants come into play, we should see a lot more business travel in the second half of 2022.”
Kirby also expects that as more franchise companies end the property improvement plan (PIP) deferrals that they initially instituted early on in the pandemic, some franchisors “will be pushing out products that are either dated or no longer in the prime location in the marketplace, and they’re going to try to replace those.”
Emerging Trends
Sustainability has risen to the forefront for many hotel owners and operators, says Davis, particularly as margin pressures tighten. As such, Davis expects more investment conversations will factor in sustainability in 2022 as the industry “looks for opportunities to stabilize profitability” and investors search for strategies to enhance asset value. “Institutional investors are increasingly divesting of companies that do not have a clear commitment to sustainability and are instead injecting capital into those that do. Impact investing is poised to be the largest asset sector globally, with $3.9 trillion in sustainable assets under management as of Q3 2021,” Davis says. “As the leading users of energy and water across all commercial real estate assets, hotels not only have an opportunity to enact real change, but failure to implement sustainable measures will lead to lower asset values, increased operational costs, and decreased consumer demand.”
Investors are also maximizing revenue potential by getting creative with real estate spaces, Davis adds, pointing to alternative accommodation players like Sonder, Mint House, WhyHotel, and Blueground. “These new players manage and lease flexible spaces (often converted hotels). Investors are attracted to these companies given their innovative tech-enabled operations and, therefore, less reliance on labor,” Davis explains. “While U.S. RevPAR [revenue per available room] recovered to 83 percent of 2019 levels in 2021, GOPPAR [gross operating profit per available room] reached only 71 percent recovery,” he continues. “With alternative accommodations providing portfolio diversification and high returns as well as meeting the demand of changing consumer preferences, JLL expects this segment to continue to attract investment in 2022, with private equity and institutional investors likely the biggest acquirers.”
Competitive Landscape
It’s a seller’s market right now, but Kirby notes, “We’re at a point where there are opportunities for both buyers and sellers to meet their goals. We believe that economic growth in most markets will support the prices that buyers ultimately have to pay.” To successfully close deals in this competitive landscape, Kirby says buyers will need to have all their ducks in a row before making a move. “If you want to be a successful bidder on an asset, you need to make sure you have your equity and debt lined up to the greatest extent possible because there are so many qualified buyers out there right now.” Gone are the days of the traditional inspection financing period, he adds. “The actual buyers end up being those that come in and are able to put down non-refundable deposits and get the deal closed so that the sellers have some assurance that the deal will move forward.”
With much of the leverage in the seller’s hands, Mallory also counsels buyers to “be prepared with your capital—do everything you can to remove contingencies when bidding for a property. Deliver transaction certainty and capital to the seller, and you’ll position yourself in the best place to win an investment opportunity.” As far as his advice for those considering divesting from an asset, Mallory maintains that now’s the time to make a move, particularly given the current macroeconomic and geopolitical uncertainties, such as inflation, interest rates, and military conflict abroad. “If you were thinking that you need to sell over the next 24-36 months, today is better than tomorrow—you have a ready, willing, and able class of buyers out there that are all very hungry for investment-grade hotel product.”
