Three Questions and a Funeral
Three Questions and a Funeral
The U.S. hotel transaction market looked to be downshifting as we closed out 2022. The first part of 2022 had three times the transaction volume (deals $10M+) of 2021, but the rise in interest rates has dramatically slowed the transaction lead volume in Q4.
Jon Peck hosted a panel titled “Rethinking Transactions” at Cayuga’s annual meeting and below is a summary of the panel discussion around three key questions in the transaction world.
➢ Teague Hunter, CEO, Hunter Hotel Advisors
➢ Davinne Reaves, CEO Vesterr, and hotel owner
➢ Andy Chopra, Managing Partner, Banyan Investment Group
What type of impact has inflation had on hotel transactions?
From a buyer's perspective, the cost of debt capital has risen, and this will push up capitalization rates and reduce multiples, which will lower values. Inflation in wages (the largest operating expense) and the cost of goods sold will drive down income. Again, lowering values.
From a seller's standpoint, replacement costs have risen dramatically, driven by a sharp rise in construction costs, which should increase the value of existing hotel assets. Average daily rates have increased significantly in most markets which should continue for the foreseeable future, which drives income. Ergo, increased value.
The bottom line is that there is a spread between the seller's and buyer's view of asset value, slowing transaction volume significantly and will likely continue into 2023.
The Industry has expected to see distressed assets come on the market as a result of the pandemic. This has not happened. Will this change?
Many markets have recovered this year, and this has to be evaluated market by market, but the opportunity could still come to buy big box hotels in some core urban markets where group demand has not recovered, and lenders are growing impatient.
As one panelist said, if you look out the window and see a surface parking lot surrounded by suburban offices, you likely have a demand problem as a current owner since the large Company travelers have not (and may not) returned to pre-pandemic levels. This could be the death (and forthcoming funeral) of the simple development strategy of plugging an upscale branded hotel into a large suburban office park, which has worked for decades.
Bottom line, there might be some opportunity to buy distressed assets in some core urban markets that have not recovered and in suburban markets relying on national corporate customers to return. Many undercapitalized sellers are in a pickle in either of these scenarios.
On a scale of 1-10, with ten being tough, where are the hotel brands on PIP compliance?
The general consensus from the panelists was ten on the enforcement scale. Meaning the brands are in full force with compliance. Some of this is understandable, given the amount of flexibility they allowed during the pandemic.
The increased PIP compliance will need to be built into underwriting new deals and will drive down offering prices for potential buyers, which acts to further expand the current bid-ask gap that is slowing transaction volume.