Large hotel-property sales in the first half dropped 39.2%, marking another rocky six months for a sector that’s endured a series of fits and starts since the pandemic crushed transaction volume three years ago.
From January through June, $7.35 billion of hotels valued at $25 million and up changed hands, down from $12.09 billion in the first half of 2022, according to Green Street’s Sales Comps Database. Amid debt-market volatility that started last year, the most recent six-month tally came in below the $9.82 billion recorded in the first half of 2021, when the market began a comeback from the nadir of 2020.
In the brokerage race, Eastdil Secured bucked the larger market trend by more than doubling its brokered sales volume over last year, landing it in the top spot. The firm closed almost $2 billion of sales in the first six months, capturing a 34.8% market share. JLL came in second, up 10.6% over last year to $1.83 billion, good for 32.1% market share. No other brokerage surpassed $1 billion of sales.
While investor interest in the sector is high, obstacles remain. In general, the high cost of debt is inhibiting mega-deals that would move the needle on volume, the pipeline of listings has been thin, and sales are taking relatively longer to close. Nonetheless, pros expressed tempered optimism for the months ahead.
“Market activity is poised to increase in the back half of the year” compared with the first six months, said Louis Stervinou, a managing director and a member of Eastdil’s management committee. “New capital sources continue to emerge in the sector given the positive fundamentals, and legacy investors that have [previously] been active in lodging have determined the timing is opportune to grow their portfolios via strategic purchases.”
To be sure, buyers still face headwinds such as rising interest rates, increasing labor and insurance costs, and potential economic uncertainty. But they’re confident they’ll be able to navigate the choppy waters in the coming months.
I am extremely bullish on the hotel market,” said Nolan Hecht, senior managing director and head of real estate at Certares. “The supply-demand fundamentals are the best I’ve seen in the last three decades. Future new hotel supply will be low due to the cost of construction as well as the lack of financing available for new hotels.” For investors, that provides room to run on revenue as demand continues to improve. “We are in the middle innings of a lodging recovery,” he said.
Revenue per available room is expected to continue rising this year, albeit at a slower rate than the year prior. The forecast of $97.95 would surpass last year’s $93.29 average, according to STR and Tourism Economics. Gross operating profit per available room fully recovered last year and is expected to notch more sizable gains next year, STR said.
Deals crossing the finish line now tend to be on the smaller side given constraints in the lending market. “Over the next six months, small is big, meaning deals that are $75 million and less are getting the most traction in the market,” said Kevin Davis, chief executive of JLL’s hotel unit in the Americas. “There will selectively be some large trades that get done, but the large trades are incredibly difficult to get done given that the cost of financing is high and the equity check required is large.”
Case in point: the two largest hotel sales — which ranked among the top five largest trades across property sectors in the first half — both managed to circumvent current debt markets. In February, a venture among Trinity Investments, Credit Suisse Asset Management and Koor Industries closed on the $835 million purchase of the 1,000-room Diplomat Beach Resort Hollywood in Hollywood, Fla. In that deal, struck last year, the buyers assumed a CMBS loan. JLL was the broker.
Meanwhile, Ryman Hospitality, a REIT, completed its $800 million purchase of the 1,000-room JW Marriott San Antonio Hill Country Resort & Spa in June entirely with cash. Eastdil brokered that trade.
Comparatively, it’s deals under $25 million that are receiving the warmest welcome from both buyers and lenders right now, said Joe Delli Santi, chief investment officer at MCR. That segment “is only marginally down in transaction volume versus last year,” thanks to an abundance of well-capitalized family offices and local and regional operators as well as a growing number of debt funds that are willing to lend in that space and are competing on loan terms. “There’s capital on the debt and equity side.”
In the months ahead, pros expect opportunities to arise from owners facing debt maturities in a more expensive lending market and assets held in investment vehicles reaching the ends of their hold periods. Likewise, REITs seeking to raise capital to buy back their own stock, which continues to trade at steep discounts to net asset values, are expected to bring more properties to market.
But any sales that do arise likely will spill over into the new year given the amount of time transactions are taking to close. “The good news about the second half is the year-over-year comparison — it will be an easy one to beat,” said Bob Webster, president of CBRE Hotels Institutional Group. “But compared to norms, transaction volume will likely be down significantly.”
CBRE landed in third place with $932.6 million of closed sales, a 60.3% drop from last year. Hunter Hotel Advisors, in fourth place, closed $324.5 million of deals, followed by Cushman & Wakefield with $305.5 million.
Eastdil captured the bulk of market share in Texas, which made up roughly half of its volume in the first six months. That coincided with investor interest in growing markets there and the hire last year of broker and managing director John Bourret in Dallas.
The firm aims to further that strategy with the hire of Jeff Davis, a veteran hotel broker who joined the firm this month in New York as a managing director and member of the hotel senior leadership team, focusing on East Coast markets. Davis spent the last 18 years at JLL, where he was a senior managing director and head of the U.S. hotel investment sales capital-markets team.
Broker rankings are based on property transactions that closed January through June 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.