Real Estate Alert: Eastdil Snags Hotel Title

The volume of large hotel sales dipped 21% in 2022 as turbulent debt markets interrupted what was expected to be a big year for trading activity in the sector.

In total, $19.9 billion of hotels valued at $25 million and up changed hands last year, down from $25 billion in 2021, according to Green Street’s Sales Comps Database.

Despite the decline, Eastdil Secured matched its own prior year volume, at $3.5 billion, catapulting the firm to first place in the brokerage rankings. JLL and CBRE took second and third.

While last year’s trading activity was relatively healthy by historical standards — even edging out the $19.1 billion tallied in pre-pandemic 2019 — it fell short of market pros’ expectations. Heading into 2022, brokers and buyers alike were confident that rebounding performance, cheap debt and a mountain of capital earmarked for the sector would produce outsize gains.

But the Federal Reserve’s sudden and swift rise interest-rate hikes during the year stymied that optimism. Financing dried up, and property values came under pressure, dramatically slowing activity in the second half. The upshot: Just $8.7 billion of large hotels traded from July to December, well behind the $15.3 billion total in the prior-year period. That slowdown came even as hotel performance continued to rebound from pandemic lows, with room rates and revenue per available room hitting record highs in 2022, according to STR.

“Perhaps needless to say, but the market went through a very dramatic change last year, and it was unusual because it was in the face of rising performance,” said Dan Peek, president and chief operating officer at Hodges Ward Elliott. “The story of 2023 will likely be heavily weighted to the second half as capital-markets headwinds subside and equity becomes more acquisitive.”

Several other pros expect investment-sales activity to pick up steam later in the year, though they also acknowledged that much depends upon stability in the debt market.

“Rates don’t have to drop for the market to pick up dramatically. We just have to have a confidence level that they aren’t going up anymore,” said Russell Flicker, co-founder and managing partner at AWH Partners. Once that happens, buyers “won’t be on the sidelines for long.”

Louis Stervinou, a managing director at Eastdil, noted that some investors already are eyeing the market pipeline for opportunities, including those deemed “irreplaceable” due to their location and quality, as well as discounted opportunities arising from distressed situations. “It’s a moment in time to acquire assets in a less competitive environment, and the market is rewarding all-cash and lower-levered investors,” Stervinou said. As a result, he expects 2023 to produce “robust” activity overall.

The next few months are expected to be a period of discovery, as buyers and sellers evaluate the economy and gain clarity on financing, which could work to narrow the bid-ask gap, said Kevin Davis, chief executive of JLL’s hotel practice in the Americas. Additionally, many owners are under pressure from maturing loans and are working with their lenders to avoid having to refinance into much higher cost new loans.

“How those conversations get resolved will have a big impact on what the rest of the year looks like,” he said. “If lenders decide to force borrowers to refinance or invest capital in an asset to extend existing debt … you will see greater transaction activity.”

Overall, sentiment “is more positive now than it was 60 days ago,” said Adam Etra, vice chair and co-head of Newmark’s lodging capital-markets group. “Investors are underwriting deals, and there is more motivation to acquire assets and transact. In addition, the debt markets are improving slightly and there are more lenders active in the market today than there were in the second half of last year.”

But buyers are proceeding with caution, weighing the motivations of sellers and keeping a close eye on forecasts for revenue growth. We “will have a very active year, but it is going to be harder to find the right deals,” said Michael Tacorian, co-founder and chief investment officer at BlackPearl Capital, which made several acquisitions within the past year. With projections calling for more moderate revenue growth in the year ahead and a “new world as it relates to debt,” sellers can expect a hit to values, he said.

Revenue per room jumped nearly 30% in 2022 and is expected to climb another 3.7% this year and 6.6% next year, according to STR and Tourism Economics.

The sector is still drawing new investors in search of yield and revenue growth that cannot be found in other asset classes. “It’s hard to predict a market recovery … but if past is prologue and [hotel] performance continues to improve … it’s logical to anticipate that once we have clarity in the debt capital markets, you are going to see a flight to quality [sectors],” said Bill Grice, who leads the hotels group in the Americas for CBRE. “And hospitality is going to be very high on that list.”

Amid last year’s slowdown in investment-sales activity, the brokerage race among the top players tightened and shifted. Eastdil, which was third in 2021, climbed to the No. 1 spot (21.6% market share) after closing several sizable trades in the second half. JLL came in second with $2.9 billion of trades (17.9%), followed closely by CBRE with $2.8 billion (17.5%).

The race for fourth place was even closer, with Hodges ($2.03 billion, 12.5%) edging out Hunter Hotel Advisors ($1.97 billion, 12.2%) by just $58 million. Hodges’ work on two hotel company buyouts — Brookfield’s $3.8 billion purchase of Watermark Lodging and the $1.4 billion sale of CorePoint Lodging to Cerberus Capital Management and Highgate — are not part of Green Street’s tally because they were classified as mergers.

Broker rankings are based on property transactions that closed in 2022 and involved full or partial stakes valued at $25 million or more. When multiple brokers shared a listing, the dollar credit was divided evenly, but each broker was credited with one transaction. Only brokers for sellers were given credit. Portfolio transactions were included if the package price was at least $25 million.