Balance Sheet Stress Expected To Drive US Hotel Deals in Latter Half of 2024
Investors Adjust to Higher Interest Rates
After a slower deals environment in 2023, hoteliers hoped 2024 would pick up the pace.
And it did, technically. It just took a little longer than they hoped.
In a review of individual hotel deals valued at over $10 million in the first two quarters, LW Hospitality Advisors found the deals environment was weaker in first quarter compared to the same period of 2023. The second quarter, however, saw notable improvement, both compared to the first quarter of 2024 as well as the second quarter of 2023.
The survey of first-quarter deals recorded 66 single-asset sales over $10 million, totaling almost $2.5 billion and approximately 10,700 rooms. The average sales price per key was $230,000. In a year-over-year comparison, the number of deals dropped by 20% while total dollar volume fell 30% and price per key decreased by 18%.
The second-quarter survey found 90 individual hotel deals, totaling more than $4 billion with about 14,350 keys. This represented a 7% increase in the number of deals as well as a 29% increase in total dollar volume. Price per key grew by about 9%.
“I think it's been a little slower than I and many others anticipated,” said Daniel Lesser, president and CEO of LW Hospitality Advisors. “With that said, I think the back half is going to be very robust.”
Picking Up the Pace
Hotel deals pace in the first half of the year was slow, said Eric Guerrero, senior managing director and partner at HVS's brokerage and advisory firm. Finance company MSCI found that total U.S. hotel transaction activity was down 32% through May compared to the same period in 2023, he said. HVS’ pipeline was down a little more than that.
“By end of the year, I would estimate the total deal volume for 2024 to be down 20% to 25% compared to 2023,” Guerrero said.
Even though the first half was pacing slower in terms of hotel transactions, there was a shift that started in the second quarter, he said. It may be that buyers and sellers have realized the current interest rates are here to stay and the Federal Reserve is unlikely to do multiple rate cuts this year as previously expected.
“Maybe we get lucky and we get one in September toward the end of the year, but even if we do, it’s not going to change anything,” Guerrero said. “The interest rates are going to go down by a quarter point. That’s not going to all of a sudden make a deal make economic sense from a return standpoint.”
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Buyers have a mindset that while they have higher interest rates, they could potentially buy a hotel that has a lower price point than it was two years ago, Guerrero said.
For the sub-$25 million deals he works on, Guerrero said his team have noticed it’s the cash-rich, liquid private clients or high-net-worth individuals who are making deals. They’re making larger down payments or paying all-cash for their deals.
“It’s those type of buyers that can maybe get a little bit of a better interest rate or debt package than maybe a first-time buyer or a weaker buyer,” he said. “We’re seeing a lot of those players coming to the market and be very active right now.”
The big, public companies that have done deals, such as Host Hotels & Resorts, have been making some of the higher-end deals and will make the transaction market more fluid this year because they can buy all-cash, Guerrero said. Some of the private-equity buyers can do the same.
New data from JLL Research shows a bifurcation of investment in hotels during the first half of the year. Select-service and extended-stay hotels saw a 10% year-over-year increase in demand among investors, reaching 57% of single-asset liquidity among the segments. JLL attributes this to the appeal of smaller deals and strong performance by these hotel types.
Luxury hotels maintained their share at 23% during the first half of the year while full-service and non-luxury hotels dropped to 20% share from 30% in 2023.
“The strong operating performance and a growing base of high-net-worth travelers are driving the demand for marquee luxury hotels, especially those located in high-growth markets and urban centers,” according to its report.
JLL predicts the bifurcation of the luxury segment and select-service and extended-stay segments will remain through the year, especially in core urban markets.
A Promising Second Half
The hotel industry will run into a lot of debt maturities in the second half of 2024, said Anne Lloyd-Jones, director of consulting and valuation services at HVS. That creates a lot of incentive for some owners to sell. The other half of the equation is all the money still sitting on the sidelines, because like any other resource, money needs to be put to work.
“If it’s sitting in your bank account, even if it’s earning 4% or whatever, that’s not the reason that the cash was assembled,” she said.
As part of his prediction of higher transaction activity in the second half of 2024, Lesser said that includes sales as well as restructuring and fresh equity coming in.
"There's clearly a wall of debt maturities that are coming down the pike," he said. "That does not necessarily mean that every deal is going to result in an outright sale. It could just be a workout or fresh capital coming in."
There are a lot of situations where deals are upside down for whatever reason, Lesser said. Sponsors will recognize that it's time to move on and execute.
"There is a bit of distress out there, and the rubber is going to meet the road where those deals that are under stress," he said. "The sponsors are just going to cave in and say, 'OK, we're done,' and just move on."