By Rod Clough, Marcus Lee, John Berean, Eric Guerrero, Alice Sherman
HVS was a proud sponsor of this year’s ALIS conference, and both our HVS Los Angeles leader Kirsten Smiley and our HVS San Francisco leader John Berean moderated educational and engaging panels at the event.
Given that hotel performance metrics remain strong in most markets and difficulties persist in the office and multi-family sectors, both investors and lenders are finding hotels to be a particularly attractive asset class for 2024. Sentiment at the ALIS conference was upbeat, with participants and analysts buoyed by the improved lending economics as of Q4 2023. Owners and developers were optimistic that more opportunities will arise on both the development and transaction fronts in 2024. Lenders are back in business, with several major hospitality lenders active and pursuing opportunities at ALIS. This also bodes well for development opportunities, as construction financing becomes more available for qualified projects. Thus, many owner/operators, investment groups, and third-party management companies are planning a stronger year for hotel transactions in 2024. Hotel executives are also enthusiastic about the strength of the current leadership labor pool and are looking to enhance their management teams with strategic, high-level hires this year.
On balance, investors remained cautiously optimistic given that it is an election year, when the overall business environment and consumer sentiment is typically more uncertain. Furthermore, in some markets, operational challenges such as line-level labor sourcing and high costs remain an issue. Operators believe ADR growth will continue in many markets across the country in 2024 to balance increased operating costs. Additionally, smart investments in technology, including artificial intelligence, are increasingly being explored as a solution to rising costs.
Development Outlook Is Bright
On the brand side, the major hotel chains touted their respective success on the development front in 2023, a year of record signings for many. Marriott announced it had over 50% more rooms signed in 2023 than in 2022, Hilton has nearly 3,300 hotels in the development pipeline, IHG is seeing strong growth in its newly assembled luxury and lifestyle segment, and Hyatt has a record pipeline of 127,000 rooms under development worldwide. There was strong interest from developers in the brands’ newest offerings, such as Hyatt’s midscale, extended-stay Hyatt Studios and Hilton’s new midscale, extended-stay LivSmart Studios brand. Wyndham announced a collaboration with sbe on a new lifestyle brand geared toward millennials and Gen Zers with the working name Project HQ.
Brand-sponsored financial participation (such as key money and fee ramp-ups) remains available for qualified development projects, particularly at the full-service and luxury levels, as brands continue to compete in a crowded marketplace. Furthermore, given the sustained growth of construction costs across the U.S., conversions (vs. ground-up construction) are increasingly gaining traction within the development community.
An Improving Transaction Environment
While everyone generally agrees that there should be some positive movement on interest rates soon, likely in the latter half of 2024, the extent and timing of those interest rate cuts remain uncertain. In conjunction with the expected moderation of interest rates, there should also be an increase in transaction activity, although the timing of that increase is unclear as well.
The hotel inventory/listings launched at ALIS were favorable. It remains to be seen if these sellers will meet the market. Rising RevPAR led to better gross operating profit levels over the last year, but rising fixed costs quickly took their toll on net operating income (NOI) levels. Some buyers are underwriting a lower NOI in year one as a result, which is placing pressure on pricing. Buyers seem to be looking for pricing in the 8–9% cap rate range for select-service hotels (fully loaded, with PIP included).
The Great PIP Problem
There currently exists a “Great PIP Problem,” where brand-mandated renovations that were deferred during the pandemic will be coming due. These updates are expected to be a focus in 2024. Thus, with major capital expenditures looming, some ownership groups will be forced to sell, particularly those that are already over-invested in their assets. This situation will likely spur transaction activity, help both brands and ownership groups clean up their portfolios, and create opportunities for the many new conversion brands that have debuted over the last few years.
What’s Next
We look forward to supporting the industry in navigating what is sure to be another interesting year in the hotel investment marketplace. HVS has a superb team of consultants, appraisers, asset and hotel managers, and brokers to help you.
