By Daniel Lesser
During 2021, vaccines and booster shots paved the way for a brief return to some semblance of normalcy, however as we enter 2022 the nearly two-year global health crisis is not over. Since the end of November, the Omicron variant of COVID-19 has surged, bringing record high daily counts of infection resulting in many companies further delaying their long-awaited return-to-office. Staffing shortages and the global supply chain challenges continue to wreak havoc on businesses and Omicron has the potential to further disrupt travel including the airline, hotel, and group meeting and convention industries. The good news is that it is not a matter of if, however when, the COVID 19 pandemic will either end or become an endemic disease which would be easier for the world’s population to coexist with. In the interim, the economic devastation wrought by government-mandated shutdowns and restrictions during 2020 are well on their way to healing as even with the recent surge in cases, it does not appear that there will be additional widespread shutdowns or lockdowns.
According to the U.S. Department of Commerce Bureau of Economic Analysis, America’s economy is now bigger than it was pre-COVID as the quarterly GDP level rose to $19.4 trillion in the second quarter of 2021, higher than the $19.2 trillion in the fourth quarter of 2019. U.S. consumers, flush with trillions of dollars of fiscal stimulus, are snapping up manufactured goods and scarce materials at a record pace. Although during the near-term interest rates are anticipated to rise, on a relative long-term historical basis they have and will continue to remain ultra-low. Corporate earnings have experienced a boost from recently unleashed pent-up consumer demand resulting in continued record-high U.S. stock market indexes.
After the isolation and/or being limited to local activities during 2020, pent-up demand for travel, particularly leisure-oriented was unleashed in 2021, culminating with U.S. hotel demand for the week between the Christmas and New Year’s Eve holidays being the highest ever recorded. As work-life boundaries blur combined with a hybrid model of producing, bleisure (business + leisure) travel will continue to grow in popularity. Although travel spending has inched back, a full recovery will not be complete until all segments return including discretionary business and group meeting and convention patronage.
During the near term, a growing list of 2022 global events that have been canceled, rescheduled, or moved to virtual will impede recovery of the group meeting connection sector. Examples include: the Electronic Entertainment Expo (E3), the J.P. Morgan 40th Annual Healthcare Conference, the New York Film Critics Circle, the Honolulu Festival, the Palm Springs International Film Awards, the Private Label Manufacturers Association Trade Show, the RSA Conference, the Sundance Film Festival, AGRITECHNICA (the world’s leading trade fair for agricultural machinery), the Bristol Hi-Fi Show, the Canadian International AutoShow in Toronto, the IMM Cologne Furniture Trade Show, ITB Berlin (the travel industry’s largest global exhibition) , Messe Frankfurt’s Ambiente Fair, Meeting Professionals International (MPI)-European Meeting and Events Conference (EMEC), and the World Economic Forum in Davos, Switzerland
The world is awash in capital chasing yield, the competition for which is placing upward pressure on pricing of many asset classes including commercial real estate. There has and continues to be an unprecedented amount of domestic and overseas debt and equity investment available for all capital stack tranches in connection with single existing and proposed lodging assets, portfolios, and mergers and acquisition financings and refinancings.
The LW Hospitality Advisors (LWHA) Q4 2021 Major U.S. Hotel Sales Survey includes 127 single asset sale transactions over $10 million. These transactions total over $9.1 billion and included approximately 26,100 hotel rooms with an average sale price per room of $350,000.
• Net of the sale of The Mirage in Las Vegas, the transactions include 126 sales that total nearly $8.1 billion and include approximately 23,100 hotel rooms with an average sale price per room of $350,000.
By comparison the LWHA Q4 2020 Major U.S. Hotel Sales Survey included 32 single asset sale transactions over $10 million. These transactions totaled $2.3 billion and included approximately 7,700 hotel rooms with an average sale price per room of $295,000.
By further comparison, the LWHA Q4 2019 Major U.S. Hotel Sales Survey identified 54 transactions totaling roughly $9.0 billion including 19,900 hotel rooms with an average sale price per room of roughly $450,000.
• Net of the sales of Bellagio Hotel & Casino and Circus Circus Hotel & Resort, both in Las Vegas, the transactions include 52 sales that total nearly $3.95 billion and include approximately 12,200 hotel rooms with an average sale price per room of $323,000.
Comparing Q4 2021 with Q4 2020, the number of trades increased by approximately 300 percent while total dollar volume increased roughly 250 percent and sales price per room increased by roughly 18 percent.
Comparing Q4 2021 with Q4 2019, the number of trades increased by approximately 142 percent while total dollar volume increased roughly 104 percent and sales price per room increased by roughly 8 percent.
For the year 2021, the LWHA Major U.S. Hotel Sales Survey includes 308 single asset sale transactions over $10 million. These transactions totaled more than $36.2 billion and included approximately 84,200 hotel rooms with an average sale price per room of $431,000. For the year 2020, the LWHA Major U.S. Hotel Sales Survey included 79 single asset sale transactions over $10 million. These transactions totaled $5.3 billion and included approximately 19,450 hotel rooms with an average sale price per room of $273,000. By further comparison, the LWHA 2019 Major U.S. Hotel Sales Survey identified 164 transactions totaling roughly $17.7 billion including 48,800 hotel rooms with an average sale price per room of $364,000. Coming off one of the worst trading years in U.S. history in 2020, the number of trades for 2021 increased by approximately 290 percent while total dollar volume increased roughly 590 percent and sales price per room increased by roughly 58 percent. Comparing 2021 with 2019, the number of trades increased by approximately 88 percent while total dollar volume increased roughly 105 percent and sales price per room increased by roughly 18 percent.
Newsworthy Q4 2021 observations include:
• Fifty-seven trades or roughly forty-five percent of the national Q4 total occurred in Florida and California.
• Of the 29 major hotel sales transacted in the State of Florida, 14 were in the southern portion of the state.
• Of the 28 major hotel sales in the State of California, 17 occurred in Southern California.
• Three major hotel trades over $2.0 million per unit each, and four sales over $1.0 million per room each.
• Eight trades or roughly 6.5 percent of the national Q4 total were reported to be predicated upon alternative use redevelopment opportunities and represent permanent deletions from hotel supply. Planned uses predominantly include various types of housing including low to middle income, for homeless individuals, student/dormitory, and boutique residential condominiums.
• Thirteen Q4 2021 sales were consummated for between $100 million and $199 million each.
• Host Hotels & Resorts, Inc. (NASDAQ: HST) acquired The Alida, Savannah, a 173-room recently constructed hotel, for approximately $103 million or $595,000 per key.
• Dauntless Capital Partners acquired the 314 room Courtyard by Marriott Los Angeles Pasadena/Old Town in California for $103.5 million or $330,000 per unit.
• Wheelock Street Capital acquired from Concord Hospitality Enterprises Company, The Ben, Autograph Collection, a 208-room Marriott soft-branded, luxury hotel in West Palm Beach, FL for $106.4 million or $512,000 per unit.
• Pacific Hospitality Group sold the leasehold interest in the 210 room Estancia La Jolla Hotel & Spa in La Jolla, CA for $108 million or $514,000 per unit to Pebblebrook Hotel Trust.
• Key International sold the dual-brand SpringHill Suites and Residence Inn by Marriott Clearwater Beach in Florida to Lodging Dynamics Hospitality Group for $115 million or $451,000 per unit.
• A joint venture between Rockpoint Group and InSite Group acquired from the Carlyle Group, the 481 room B Ocean Resort Fort Lauderdale, formerly known as the Yankee Clipper, for $117.9 million or $245,000 per unit. The buyer paid an additional $9.0 million for an adjacent 1.8-acre parking lot.
• Electra America and Korman Companies (owner of the AKA brand) acquired the 201 room Conrad Miami from a partnership that included Mast Capital and Angelo Gordon for $126.5 million or $629,000 per key.
• Host Hotels & Resorts, Inc. (NASDAQ: HST) acquired Alila Ventana Big Sur for $150 million or a record $2.542 million per from Hyatt Hotels Corporation (NYSE: H) who purchased the property earlier in the year from Geolo Capital for $148 million or a prior record setting $2.508 per unit. HST entered into a long-term management agreement with H to operate the facility, which more than likely was a requirement for the transaction to occur.
• Hawkins Way Capital purchased the 764 room DoubleTree by Hilton Hotel Metropolitan from RLJ Lodging Trust (NYSE: RLJ) for $153 million or just over $200,000 per unit. The property which ceased operations during the height of the pandemic and has yet to reopen, was acquired by RLJ in late 2010 for $335 million, or more than double this most recent transaction.
• A joint venture between Trinity Real Estate Investments and Certares Real Estate Management purchased from Hong Kong-based Swire Properties, the 352 room Miami’s EAST hotel for $174 million or $494,000 per unit.
• Sunstone Hotel Investors, Inc. (NYSE: SHO) agreed to pay $175 million, or about $2.058 million per room, to buy the newly developed 85-room Four Seasons Resort Napa Valley from Alcion Ventures.
• Dorado Beach, a Ritz-Carlton Reserve property located in the Commonwealth of Puerto Rico, an unincorporated U.S. territory, was acquired by Braemar Hotels & Resorts Inc. from Caribbean Property Group LLC for $186.6 million or $1.940 per unit. The acquisition included an income stream attributable to 14 luxury residential units adjacent to the property that participate in a rental management program. The resort component consists of 96 units.
• A joint venture between Trinity Real Estate Investments LLC and Oaktree Capital Management LP acquired the leasehold interest in the 305 room W Hollywood for $197 million or $646,000 per unit from Host Hotels & Resorts, Inc.
• Two Q4 2021 sales were consummated for between $200 million and $299 million each.
• The Harkham family sold the closed 86 room Luxe Rodeo Drive Hotel and its existing high-end retail shops in Beverly Hills, CA for $200 million or $2.325 million per key to LVMH, the Paris-based luxury conglomerate. The property includes three high-end retail storefronts leased to Rolex, Patek Philppe, and Ferrari which skews upward the per-unit amount.
• Sunstone Hotel Investors, Inc. (NYSE: SHO) sold to an undisclosed buyer the 340-room Embassy Suites La Jolla for $226.7 million or $667,000 per unit. SHO’s Q3 2021 press release included an interesting comment: “The disposition of the …., while the sale of the Embassy Suites La Jolla is a great example of capitalizing on an opportunity to realize the value of well-located real estate at a sale price far in excess of the hotel’s value.”
• Three Q4 2021 sales were consummated for between $300 million and $399 million each.
• Oracle Co-Founder Larry Ellison’s investment firm Lawrence Investment purchased the 422 room Hyatt Regency Lake Tahoe Resort, Spa and Casino at Lake Tahoe, NV for $345 million or $818,000 per key. The seller, Hyatt Hotels Corporation will continue to manage the property under a long-term agreement.
• A partnership between The Athens Group and MSD Partners purchased the 319-unit Naples Beach Hotel & Golf Club, a 125-acre resort that fronts the Gulf of Mexico in Naples, FL for $362 million or $1.135 million per key. The new ownership plans to redevelop the resort into a mixed-use destination called Naples Beach Club which will include a 216-room hotel operated by Four Seasons Hotels and Resorts, and 185 for-sale residential units managed by Discovery Land Co.
• CGI Merchant Group acquired from the Trump Organization the leasehold interest in the 263 room Trump International Hotel Washington, D.C. for $375 million or $1.425 million per unit. The leased fee interest in the property which is colloquially referred to as the Old Post Office and Clock Tower is owned by the General Services Administration (GSA), an independent agency of the United States government is listed on the National Register of Historic Places. In 2013, the GSA leased the property for 60 years for redevelopment to a luxury hotel which opened in September 2016. The buyer intends to rebrand the hotel as a Waldorf Astoria to be managed by Hilton Worldwide.
• Two Q4 2021 sales were consummated for between greater than $800 million each.
• A joint venture between Fontainebleau Development and Koch Real Estate acquired from Brookfield Properties the 1,000 room Diplomat Beach Resort in Hollywood, FL for $850 million or $850,000 per unit. Interesting to note that this sale which was originally slated to close in Q2 2020 for $800 million, ultimately transacted 20 months later for $50 million or 6.25% more than pre-pandemic pricing.
• Hard Rock International has agreed to acquire the 3,044 Mirage casino resort on the Las Vegas Strip from MGM Resorts International for $1.075 billion. The buyer acquired operating assets subject to a long-term lease agreement with VICI Properties Inc., owner of the underlying land. The seller will retain the “Mirage” name and license it to Hard Rock for up to three years, until a renovation is complete, and rebranding takes effect. The buyer intends to construct a 1,000-room guitar-shaped hotel tower on the property.
During the past year, institutional investment platforms, many of whom are lodging-centric, dominated the hotel acquisition arena. Examples include: Apollo Global Management, Apple Hospitality REIT, Arbor Lodging Partners, Athens Group, AWH Partners, Blackstone, Braemer Hotels & Resorts, Concord Hospitality Enterprises, Diamondrock Hospitality Company, Driftwood Capital, Electra America Hospitality Group, Fortress, GIC, Hard Rock International, Highgate, Hilton Grand Vacations, Host Hotels & Resorts Inc., HRI Properties, Hyatt, JMI Realty, KHP Capital Partners, KKR & Co., KSL Capital, Lawrence Investments LLC, Linchris Hotel Corp., London & Regional Properties, Lowe Enterprises, Lubert Adler, Magna Hospitality Group, MCR, Monarch Alternative Capital, MSD Partners, Noble Investment Group, Oaktree Capital Management, Ohana Real Estate Investors, OTO Development Oxford Capital Group, Peachtree Hotel Group, Pebblebrook Hotel Trust, PIMCO, Procaccianti Hotel REIT, RLJ Lodging Trust, Rockbridge, Rockpoint Group, Schulte Hospitality Group, Songy Highroads, Starwood Capital Group, Stockdale Capital Partners, Summit Hotel Properties, Sunstone Hotel Investors, TPG Real Estate Partners, Trinity Real Estate Investments, Wheelock Street Capital, and Westmont Hospitality Group.
Foreign money has returned to invest in U.S. lodging assets, which helps underpin a market already flush with cash from the huge gains in business and the stock markets throughout 2021, and the hotel transaction market is anticipated to remain vibrant through the foreseeable future. Investment in lodging has historically proven to be a hedge against inflation as scientific knowledge allows for continuous re-pricing of the daily leasing of guestrooms. However, inflationary pressures on hotel operating expenses may result in a rise in costs exceeding increases of revenues.
New lodging construction is relatively muted due to a reduced inflow of new projects as compared to pre-COVID levels, and hotel openings during the first half of the year which exited the pipeline. The prolonged effects of the pandemic, above-average inflation, rising interest rates, labor, and material shortages, as well as price increases, will continue to be key factors in decision-making for developers during the near term.
Since its founding, America has had to manage and navigate emergencies, disasters, wars, scandals, blunders, upheavals, and revolts of all types. Even prior to the momentous events of the past two years that shook up the planet, the tectonic plates of culture, society and technology were already shifting and reshaping the world. The pandemic took those changes and accelerated them, exacerbated them, and in some cases, threw them into chaos. Despite how tenuous the state of the world remains, in many ways life in America has already snapped back, however with a “new normal” evolving and paradigm shifts becoming baked in. During the past two years, the lodging industry has had to and will continue to adapt, maintain resilience, and embrace innovation. U.S. hotel transaction activity has gained traction, and with the accumulation stage of a new market cycle having clearly begun, many see epic appreciation potential over the next several years as the lodging industry metrics hopefully “catch up” to asset pricing observed by recent transactions.
