What to Expect From U.S. Hotel Dealmaking in 2023: Trophy Sales and Trauma

Sales of hotel rooms are booming post-pandemic. But market turmoil will likely put most dealmaking for hotel assets on hiatus for the first half of the year.

A few exceptional bright spots for deal flow might be for large hotel groups acquiring small luxury and lifestyle brands and portfolios in popular destinations where they need to plug gaps in their networks. Deals for Dream Hotels, Viceroy, and Ace announced in the past several months suggest that some assets are recession-proof, given that those brands appear to have fetched prices similar to what they would’ve likely nabbed pre-pandemic.

Expect lifestyle and luxury to remain a safe haven of sorts in an uncertain first half of the 2023, according to several investment bankers and brokers at the Americas Lodging Investment Summit (ALIS) in Los Angeles.

A few factors have all but frozen significantly sized hotel transactions. Sellers are seeing strong cash flow thanks to the boom in demand and expect their properties to be valued more than used to be as a result. But the most reliable sources of financing are betting that interest rates will stop rising by mid-year and will be lower by year-end, making them reluctant to seriously look at deals now. Without the big money pl;ayers making competitive offers, sellers of hotel portfolios don’t have enough buyers to make them feel confident their assets are properly valued.

Trauma?

It’s anybody’s guess when interest rates will stabilize or begin to drop. If and when that happens, big money will return to hotel investing in a large way.

In the meantime, hotel owners in the U.S. have approximately $30 billion to $40 billion worth of debt that needs to be repaid or essentially refinanced, some investment bankers estimated.

For properties in markets that have been slow to recover from the pandemic-induced disruption, such as Minneapolis, San Francisco, and Houston, some hotel owners may get caught out. Owners who had a floating rate loan in the pandemic or before at about typical 4 percent rates may now face 8 percent rates, or double the interest payments.

Overall transaction volume in the U.S. may struggle to reach half the volume of 2021’s level, according to Jeffrey Davis, head of U.S. investment sales, JLL.

Trophy Sales?

As in all markets, there are always exceptions. Trophy assets, or single properties that are coveted for status or bragging rights as much as potential returns on investment, remain attractive in the current market.

Interest in trophy hotels in hot markets, especially the Sunbelt cities of Phoenix, Nashville, Austin, and much of Florida, remains strong along thanks to the cash flow being generated by a surge in demand from travelers for these cities.

While institutional money may be cautious, the family offices of high net worth individuals are more willing to splash out now.

Some newfound investors have been attracted to hotel assets as a possible inflation hedge, given their typically steady cash flow and dynamic pricing of room rates to react to supply and demand changes, said Alexandra Lalos, managing director, Hodges Ward Elliott, a boutique real estate capital markets advisor.

Expect the regional and global hotel brands to stay in a cautiously acquisitive mood. The largest global hotel conglomerates are under pressure from Wall Street to keep growing their property inventory as fuel to help continue to push forward their loyalty programs and credit card marketing deals. Adding lodging inventory to fill in gaps in types of property, rate range, and geographic location can increase traveler usage of the loyalty programs and credit cards of the big chains, said Croft Young, managing director, Morgan Stanley

The profitable business models of the extended stay and lifestyle segments will retain coveted status this year, predicted Eliot Freeston, managing director, Moelis & Company.

A relative lack of new supply in the U.S. is helping to support valuations, especially as alternative assets in real estate, such as office space or shopping malls, continue to struggle in comparison, said Bradley Langner, managing director at the hospitality finance group of Piper Sandler.

With international travel resuming at significant levels by June, it’ll be easier for foreign investors to once again see potential investors and meet face-to-face to close deals, said Scott L. Smith, a managing director at Goldman Sachs.

But if you’re waiting for headline-making hotel deals, you may be waiting for several months through the first half of 2023.

“Everyone’s making for someone else to make the first move,” Freeston said.