By Daniel H. Lesser
Despite the Federal Reserve’s aggressive monetary policy aimed at controlling persistent inflation, during the first half of 2024, the U.S. economy continued to demonstrate resilience. While strong growth in many subcategories of Gross Domestic Product (GDP) including consumer and government spending, investment, exports, and employment have many optimistic, the economic outlook is tempered by global geopolitical risks including on-going wars in Europe and the Middle East. Although the U.S. economic outlook remains positive, signs of a softening consumer are mounting within lower-to-middle-income households. While recession concerns remain, heightened anxiety that the U.S. will experience two consecutive quarters of negative GDP has significantly diminished. Furthermore, an uncertain U.S. presidential election appears to be leading consumers and businesses to curtail spending for the balance of the year.
Through Q2 2024, the U.S. lodging industry is operationally sound, with growth being fueled by corporate transient, group, and inbound foreign travel, while domestic leisure demand continues to wane as Americans continue returning to travel overseas. Group trends remain solid, helping generate a base level of demand that further supports pricing power for hotel operators. While strong and with building momentum, foreign inbound travel to the U.S. remains below pre-pandemic levels. It is interesting to note that since 2000, U.S. presidential election years have seen Real GDP growth decline by 110 bps on average vs. the prior year. In each of the past four U.S. presidential election years, both demand growth and RevPAR growth slowed from the prior year. Elevated development costs coupled with restricted availability of construction financing which if obtainable is expensive, continues to diminish feasibility of new hotel supply, a phenomenon which is anticipated to continue during the foreseeable future. Finally, hotels in several lodging markets including New York City are benefiting from restrictions that have been imposed on short-term rentals, effectively reducing such competition.
Publicly traded hotel companies are leveraging their platforms and loyalty programs to fuel growth, as evidenced by several recently announced acquisitions and/or strategic alliances/partnerships. Examples include:
• Hilton’s $210M acquisition of the Graduate Hotels brand from AJ Capital, who will retain real estate ownership of the existing portfolio.
• Hilton’s marketing partnership with Small Luxury Hotels of the World (SLH) network of independent hotels.
• Hilton’s marketing partnership with AutoCamp, an outdoor hospitality company known for its custom Airstreams and glamping-style tents.
• Hilton’s acquisition of a majority stake in Sydell Group thereby adding the NoMad brand to its portfolio.
• Marriott International’s strategic alliance with MGM Resorts International.
• The Rio Hotel & Casino in Las Vegas, NV, which is undergoing a multi-phased $340 million transformation, has joined Hyatt Hotels Corporation’s World of Hyatt loyalty program.
The LWHA Q2 2024 Major U.S. Hotel Sales Survey includes 90 single asset sale transactions over $10 million which totaled just over $4.0 billion and included approximately 14,350 hotel rooms with an average sale price per room of $279,000.
• In comparison, the LWHA Q1 2024 Major U.S. Hotel Sales Survey included 66 sales that totaled just over $2.5 billion and included approximately 10,700 hotel rooms with an average sale price per room of $230,000. Comparing Q2 2024 with Q1 2024, the number of trades increased approximately 36 percent while total dollar volume grew roughly 63 percent and sale price per room rose 21 percent.
• By further comparison, the LWHA Q2 2023 Major U.S. Hotel Sales Survey included 84 single asset sale transactions over $10 million which totaled $3.1 billion and included approximately 12,100 hotel rooms with an average sale price per room of $257,000. Comparing Q2 2024 with Q2 2023, the number of trades increased approximately 7 percent while total dollar volume grew nearly 29 percent and sale price per room rose by roughly 9 percent.
Although the lodging sector is experiencing strong fundamentals, compared to recent history, the cost of debt remains relatively high, which continues to dampen sale transaction activity. With this said, bid/ask spreads appear to be easing, resulting in some “wind in the sails” of hotel sale investment volume. Additional noteworthy Q1 2024 observations include:
• The five largest U.S. hotel sale transactions by Total Sale Price include:
• Turtle Bay Resort Kahuku, HI – 450 rooms, $725M or $1,611,111per room
Buyer: Host Hotels & Resorts, Inc. (NASDAQ: HST), Seller: Blackstone.
Reportedly, the trade includes a 49-acre parcel entitled for development.
• 1 Hotel Nashville & Embassy Suites by Hilton Nashville Downtown Nashville, TN – 721 rooms, $530M or $735,090 per room.
Buyer: Host Hotels & Resorts, Inc. (NASDAQ: HST), Seller: JV Starwood Capital Group & Crescent Real Estate LLC & High Street Real Estate Partners.
• Hyatt Regency San Antonio Riverwalk San Antonio, TX – 630 rooms, $230M or $365,079 per room
Buyer: Sunstone Hotel Investors, Inc. (NYSE: SHO), Seller: Hyatt Hotels Corporation (NYSE: H).
• The William Vale Brooklyn, NY – 184 rooms, $177M or $961,957 per room
Buyer: EOS Hospitality, Seller: Wythe Berry Fee Owner
Reportedly, the property includes 40K SF of office and retail space.
• Hilton La Jolla Torrey Pines La Jolla, CA – 394 rooms, $165M or $418,782 per room
Buyer: JRK Property Holdings, Seller: Braemar Hotels & Resorts (NYSE: BHR).
• The five largest U.S. hotel sale transactions by Sale Price Per Room include:
• Turtle Bay Resort Kahuku, HI – 450 rooms, $1,611,111 per room
Buyer: Host Hotels & Resorts, Inc. (NASDAQ: HST), Seller: Blackstone
Reportedly, the sale includes a 49-acre parcel entitled for development
• The William Vale Brooklyn, NY – 184 rooms, $961,957 per room
Buyer: EOS Hospitality, Seller: Wythe Berry Fee Owner
Reportedly, the property includes 40K SF of office and retail space.
• Sonder Flatiron New York. NY – 65 rooms, $735,789 per room
Buyer: Azora Exan, Seller: Premier Equities
Reportedly, the hotel is operated by Sonder under a lease and retail space is occupied by three tenants.
• 1 Hotel Nashville & Embassy Suites by Hilton Nashville Downtown Nashville, TN – 721 rooms, $735,090 per room
Buyer: Host Hotels & Resorts, Inc. (NASDAQ: HST), Seller: JV Starwood Capital Group & Crescent Real Estate LLC & High Street Real Estate Partners
• Best Western on the Bay Inn & Marina North Bay Village, FL – 118 rooms, $635,593 per room
Buyer: Continuum Development, Seller: Jesta Group
Reportedly, the hotel and adjacent Shuckers Waterfront Bar & Grill will remain operational until buyer completes assemblage and completes redevelopment plans to include luxury condominiums and a hotel.
• Twenty trades, or roughly 22 percent of the national quarter total number of sales occurred in the State of California, followed by nine sales, or 10 percent of the national quarter total number of sales occurred in both Florida and Georgia. Combined, forty-four trades, or 42 percent of the national quarter total number of sales occurred in California, Florida, and Georgia.
• The $725 million sale of the 450-room Turtle Bay Resort in Kahuku, HI represented 18 percent of Q2 2024 total dollar investment volume. Host Hotels & Resorts, Inc. (NASDAQ: HST) acquired the asset which included a 49-acre parcel entitled for development from Blackstone, for roughly $1.6 million per unit. HST intends to brand the hotel as a Ritz-Carlton affiliate, and as part of the deal, Marriott International (NASDAQ: MAR) “provided key money and favorable modifications on several existing management agreements.” Blackstone purchased the property in 2019 for $332 million and subsequently invested significant capital to renovate the resort.
• Three major hotel sale transactions in the State of Tennessee represented a grand total of roughly $564 million or 14 percent of Q2 2024 total dollar investment volume. One of these transactions encompassed Host Hotels & Resorts, Inc. (NASDAQ: HST) $530 million acquisition of the 215-room 1 Hotel Nashville and adjacent 506-room Embassy Suites by Hilton Nashville Downtown from a joint venture that included Starwood Capital Group, Crescent Real Estate and High Street Real Estate Partners.
• Twenty major hotel sale transactions in the State of California represented a grand total of roughly $546 million, or 14 percent of Q2 2024 total dollar investment volume.
• Nine major hotel sale transactions in the State of Florida represented a grand total of roughly $424 million, or 11 percent of Q2 2024 total dollar investment volume.
• Additional noteworthy trades include:
• Scottsdale Plaza Resort & Villas Paradise Valley, AZ – 404 rooms, $124.3M or $307,673 per room
Buyer: JV Trinity Investments & Partners Group, Seller: JV Rockpoint & Highgate
• W Fort Lauderdale Fort Lauderdale, FL – 346 rooms, $152.65M or $411,185 per room
Buyer: Blackstone, Seller: Related Companies
Institutional investment platforms, several of whom are lodging centric, transacted during Q2 2024.
• Examples of buyers include Apple Hospitality REIT, Inc. (NYSE: APLE), Blackstone, Chatham Lodging Trust (NYSE: CLDT), Driftwood Capital, EOS Hospitality, Host Hotels & Resorts, Inc. (NASDAQ: HST), JRK Property Holdings, Magna Hospitality Group, RLJ Lodging Trust (NYSE: RLJ), Sage Hospitality Group, Sunstone Investors, Inc. (NYSE: SHO), and Trinity Investments.
• Examples of sellers include AJ Capital Partners, Ashford Hospitality Trust, Inc.( NYSE: AHT), Blackstone, Braemer Hotels & Resorts (NYSE: BHR), Extended Stay America, Highgate, Hyatt Hotels Corporation(NYSE: H), MCR, McSam Hotel Group, Noble Investment Group, Oxford Hotels & Resorts, Related Companies, Starwood Capital Group, Stonebridge Companies, Summit Hotel Properties, Inc.(NYSE: INN), Värde Partners, and Westbrook Partners.
Copious amounts of debt remain available for the sector as evidenced by numerous recently announced high-profile acquisition financings and property refinancings, including:
• $112.48M provided by Blackstone Real Estate Debt Strategies to fund the $171M purchase of the 390-room Hilton Boston Back in Boston, MA.
• $115.1M loan provided by Apollo Global Management in connection with the $177M acquisition of the 183-key William Vale in Brooklyn, NY.
• $460 million loan led by Morgan Stanley, Deutsche Bank J.P. Morgan for the $705M acquisition of the 705-key Arizona Biltmore in Phoenix, AZ.
• $40M refinancing provided by Bridge Investment Group in connection with the 395-room Falls Church Marriott Fairview Park in Falls Church, VA.
• $55M refinancing provided by Hudson Bay Capital Management LP for the 561-room DoubleTree by Hilton Hotel Denver in Denver, CO.
• $185M refinancing package for the 352-key EAST Miami in Miami, FL (Deutsche Bank originated a $152.5M senior loan and KSL Capital Partners provided the mezzanine portion of the refinancing).
• $267.2M refinancing originated by Bank of America of the 673-room Renaissance Nashville Hotel in Nashville, TN.
• $290M refinancing originated by Barclays for the 512-room TWA Hotel at JFK Airport in Queens, NY.
• $325M refinancing originated by Goldman Sachs and Bank of America in connection with the 1,000-unit Marriott Marquis Houston, TX.
• $335M refinancing ($300M CMBS loan from Goldman Sachs, plus $35M in mezzanine financing) for the 153-room Mark Hotel in New York, NY.
• $575M debt package ($452 million first-lien mortgage co-originated by Citi Real Estate Funding and German American Capital Corp. and a $123M mezzanine loan from TD Miami Beach Mezz LLC and PPIB Credit Investments III Inc.) for the 1,000-key Diplomat Beach Resort in Hollywood, FL.
• $632M CMBS refinancing led by Citigroup Global Markets for a 53-hotel (5,958 rooms across 14 states) portfolio owned by MCR and Building and Land Technology.
• $735M CMBS refinancing of the 2,619-key Walt Disney World Swan & Dolphin Resorts in Lake Buena Vista, FL (led Bank of America, Wells Fargo, and Goldman Sachs).
• $1.55B refinancing of nine Great Wolf Resort properties totaling 4,083 rooms ($1.3B CMBS financing led by Wells Fargo and a $250M mezzanine loan from Vici Properties).
The much-anticipated wave of debt maturities has slowly commenced, with many capital-starved hotels under brand pressure to now execute pandemic deferred Property Improvement Plans (PIPs). Property owners that utilized Reserve for Replacement funds to service debt during the past four years are now faced with refinancing in an elevated interest rate environment. Many will elect to dispose of assets, while others will “hand keys” to their lender(s). Creditors are in the business of obtaining market returns on debt financing, not owning commercial real estate, which in turn will result in increased hotel sale transaction activity. This phenomenon may be lessened if the Federal Reserve lowers borrowing rates which would ease refinancing efforts of existing sponsors. Additionally, a narrowing of credit spreads in Single-Asset Single-Borrower Commercial Mortgage-Backed Securities (SASB CMBS) has positioned such financing as favorable for large institutional lodging assets with a history of strong performance and cash flow.
Compared to other asset classes, hotels present very attractive investment opportunities. High-quality assets with strong in-place performance are trading at aggressive cap rates driven in part by ample equity earmarked to the lodging sector. In addition to forthcoming debt maturities, equity fund life expirations will drive increased hotel sales activity. Sale pricing of U.S. hotels is anticipated to remain robust for top-tier properties with in-place cash flow while reduced valuation opportunities may only be available for complex and/or less desirable assets.
