By Daniel Lesser
Notwithstanding a persistent jittery economic environment and rising global geopolitical concerns, market conditions in the U.S. appear simultaneously shaky and resilient. National lodging sector metrics, particularly average room rates and RevPAR, continue to achieve exceptional results as demand for travel and lodging remains robust. Although overall leisure patronage is trailing off from pandemic highs, due in part to Americans opting for international travel, domestic corporate individual and group meeting business continues to rebound to pre Covid-19 levels. Additionally, inbound international travel to the U.S. continues to recover.
Raised levels of inflation continue to fuel rising prices, particularly for groceries and gasoline, are challenging consumer confidence although Americans continue to voraciously spend on material goods and experiences including travel. Low unemployment rates and high job growth render the nation’s employment market strong. However, many major companies are struggling to adapt to the changing economy and have implemented significant layoffs. Examples include Cisco Systems, Inc., CVS Health, Epic Games, Inc., Farmers Insurance Group, Geico, General Motors Company, Google, Juniper Networks, Inc., LinkedIn, Qualcomm, Qualtrics, T-Mobile, Tyson Foods, Inc., Washington Post, Wells Fargo & Co., and Yellow Corporation.
Labor shortages, rising cost of debt, continued supply chain constraints, and increased inflation of operating costs are challenging the U.S. lodging sector. In addition to the need to replenish FF&E reserve accounts, many owners are being forced to execute deferred capital expenditure refurbishments to remain in compliance with brand mandated property improvement plans (PIP). On the flip side, the nation’s net lodging supply growth remains well-below the long-term average.
The LWHA Q3 2023 Major U.S. Hotel Sales Survey includes 88 single asset sale transactions over $10 million which totaled roughly $3.2 billion and included approximately 14,000 hotel rooms with an average sale price per room of $228,000. In comparison, the LWHA Q3 2022 Major U.S. Hotel Sales Survey includes 119 single asset sale transactions over $10 million which totaled roughly $3.7 billion and included approximately 17,400 hotel rooms with an average sale price per room of $212,000. Comparing Q3 20223 with Q3 2022, the number of trades decreased by approximately 26 percent while total dollar volume declined roughly 14 percent, however sale price per room increased by 7.5 percent.
Noteworthy Q3 2023 observations include:
• Eighteen trades or roughly 17 percent of the national quarter total occurred in the State of Florida, followed by nine trades or 15 percent of the national quarter in New York. Additionally, ten trades or 11 percent of the national quarter occurred in California followed by 9 trades or 10 percent of the national quarter in Arizona. Combined, forty-six trades or slightly more than half of the national quarter occurred in Florida, New York, California, and Arizona. Furthermore, New York led the third quarter dollar volume with $1.2 billion in sales, followed by $373 million in Florida, $340 million in Arizona, and $314 million in California. Total dollar volume for the four states equaled roughly $2.250 billion or 70 percent of the third quarter total.
• The Qatar Investment Authority acquired from a joint venture that included Witkoff Group, Mubadala Investment Co., New Valley Realty, Highgate, and Greenland Group, the 610 room Park Lane Hotel in New York, NY for $623 million or just over one million dollars per room. During 2013, Witkoff Group led a joint venture to purchase the property for $654 million with the intent to redevelop the building to high end residential condominiums.
• McSam Hotel Group sold to an LLC linked to Dauntless Capital Partners a 646-unit commercial condominium that includes the Hampton Inn by Hilton New York Times Square and the Home2 Suites by Hilton New York Times Square in New York, NY. The $290 million trade equates to nearly $450,000 per room.
• Five Q3 2023 sales were consummated for between $100 million and $199 million each.
• Magna Hospitality Group acquired from McSam Hotel Group, the 400 room Motto by Hilton New York City Times Square in New York, NY for $170 million or $425,000 per unit.
• Southwest Value Partners sold to Global Hospitality Investment Group, the 378 room DoubleTree Resort by Hilton Hotel Paradise Valley – Scottsdale in Scottsdale, AZ for $115.5 million or roughly $305,000 per unit.
• AHI-CLG LLC acquired from South Korean based Hanjin KAL Corp., the 275-unit Waikiki Resort Hotel in Honolulu, HI for $108.4 million or $394,000 per room.
• Miller Global Properties sold to Dynamic City Capital the 177 room Canopy by Hilton Scottsdale Old Town in Scottsdale, AZ for $101.8 million or $575,000 per unit.
• GEM Realty Capital acquired from Steve Hermann Hotels the 85-unit Inn at Rancho Santa Fe in Rancho Santa Fe, CA for $100 million or nearly $1.2 million per room.
• Permanent deletions of hotel properties that were acquired for alternative use include:
• The City of Los Angeles $60 million ($204,000 per room) acquisition of the 294-unit Mayflower Hotel in the Westlake District of Los Angeles, CA which had been operated for two years as a pandemic era shelter and is now slated to be utilized as a homeless shelter.
• The Housing Authority of The City and County of Denver $26 million ($134,000 per unit) purchase of the 194 room Best Western Plus Executive Residency Denver-Central Park Hotel in Denver, CO now slated to be used for supportive housing.
• Costco Wholesale Corp. acquired at an auction the 265-unit DoubleTree by Hilton Hotel Norwalk in Norwalk, CT for $13.8 million ($52,000 per room) with plans to demolish the improvements and create additional parking for an existing adjacent Costco, and development of a new 5,400 square foot Costco Tire Center.
• Oriol Housing Associates LLC, an affiliate of nonprofit community development corporation Worcester Community Housing Resources purchased the 114 room Quality Inn & Suites Worcester in Worcester, MA for $10.8 million ($95,000 per unit) with plans to convert the property into a 90-unit supportive housing development.
• The 125-unit Collective Paper Factory in Long Island City, NY was acquired for $34.750 million ($278,000 per room) for conversion to a Humanitarian Emergency Response and Relief Center for migrants. The property previously traded in 2019 for $58 million which now represents a 40 percent decline.
• Hyundai Motor America (Hyundai) purchased the 28 room Liberty Inn at 500 W. 14th St. New York, NY, Manhattan’s famous short stay hourly rate hotel, for $22.5 million ($804,000 per room). Hyundai owns the Genesis House building directly across the street, which is home to a showroom for Hyundai’s luxury Genesis line, a high-end Korean second-floor restaurant, and a tea pavilion.
• Jacobs Entertainment acquired the 99-unit Desert Rose Inn in Reno, NV for $10.450 million ($106,000 per unit). The buyer has been purchasing properties along Downtown Reno’s 4th Street corridor with the intent to develop a one-billion-dollar mixed-use project known as the Reno Neon Line slated to include hotels, residential units, retail stores, entertainment outlets, and public art.
• 97 Wallace Studios LLC purchased the 75 room Americas Best Value Inn Nashville Airport for $10 million ($133,000 per unit) to convert the property into a multifamily apartment complex.
• Recent lodging sector corporate merger and acquisition announcements include:
• In an all-cash deal valued at $1.4 billion, Hersha Hospitality Trust (NYSE: HT) is slated to be acquired by KSL Capital Partners.
• Following months of private discussions between the two companies, on October 17, 2023, Choice Hotels International Inc. CHH (NYSE) made a public hostile $9.8 billion (including debt) buyout bid to acquire all the outstanding shares of Wyndham Hotels & Resorts Inc. WH (NYSE), whose board of directors unanimously and immediately rejected. It will be interesting to see if the parties agree to financial terms, and if so, if the deal obtains applicable regulatory approvals and is ultimately consummated.
Institutional investment platforms, many of whom are lodging centric, dominated the Q3 2023 hotel transaction arena.
• Examples of buyers include Apple Hospitality REIT Inc., Blue Flag Partners, Crescent Real Estate LLC, Dauntless Capital Partners, DiamondRock Hospitality Company, Dynamic City Capital, GEM Realty Capital, Global Hospitality Investment Group, Highline Hospitality Partners, Kolter Group, Magna Hospitality, MCR Hotels, Meriwether Companies, Qatar Investment Authority, and RADCO Companies.
• Examples of sellers (some of whom were also buyers) include BRE Hotels & Resorts LLC, Concord Hospitality Enterprises, Fortress Investment Group LLC, Highgate, Lightstone Group, McSam Hotel Group, Miller Global Properties, MCR Hotels, NewcrestImage, Peachtree Hotel Group, Southwest Value Partners, and Wright Investments, Inc.
Rising debt costs and tightening lending standards have exerted negative pressures on commercial real estate values. While obviously a risk for existing property owners, investment opportunities will evolve as trillions of dollars of commercial real estate debt matures over the next several years. The bulk of this debt originated when base interest rates were near zero and will need to be refinanced in an environment where rates are much higher and in a market with much less liquidity. Many owners will need to provide or source additional capital to bridge unavoidable financing gaps when dealing with maturing loans, while some sponsors will be forced to sell asset(s).
In addition to the elevated cost of debt, wide bid-ask spreads have resulted in subdued transaction volume thus far this year. Continued strong sector metrics are anticipated to backdrop large amounts of impending debt maturities on the horizon and billions of dollars reaching the end of underwritten holding periods, all of which will catalyze transaction activity. Significant amounts of sidelined capital chasing yield will be deployed into a variety of hotel investment opportunities that currently have compromised financial structures. With an aggressive and sophisticated asset management plan, investments today offer significant upside potential. Furthermore, with Covid-19 rapidly becoming a distant memory, inbound foreign investment into the U.S. is now approaching pre-pandemic levels.
Despite recent increases, interest rates are still low by historical standards, yet borrowers have been hamstrung due in part to the historical capitalization rate compression that has occurred over the past decade, combined with a widening spread from lenders. The pullback in overall leverage that debt providers are willing to lend at is tied directly to capitalization rate inflation concerns.
Although credit markets are volatile, there is no shortage of available financing for hotel assets as institutional and private investment funds are backfilling a void left by banks. Knowledgeable sector investors who comprehend market nuances and can leverage relationships with multiple types of capital partners can secure investment funds regardless of market conditions. Lenders make money deploying debt capital, not sitting on the sidelines with cash.
Sophisticated investors will utilize a prudent balance of debt and equity to avoid overleverage. Furthermore, they will make use of interim debt and not lock in long term fixed commitments only to end up with large prepayment obligations when interest rates are anticipated to decline in 2026-27. Property values in 2027 will no doubt exceed the peak of 2021-22 as recoveries always exceed previous all-time highs. Those who buy now at market pricing, particularly in major U.S urban markets, and are smart about capital stack structure and coverage with stress tests will prevail.
