In the year following the start of a global pandemic that put the hotel industry into a severe and nearly instant downturn, U.S. hotel transactions have taken a divergent path.
All the pent-up capital readied for hotel deals had to go somewhere, driving both deals pace and dollar volume to and above pre-pandemic levels. At the same time, troubled hotel assets ended up at auctions despite federal relief packages, lender flexibility and stronger-than-expected leisure travel.
On top of that, the state of California spent billions to buy older hotel properties to convert to housing units for the homeless.
Here are some of the highlights from Hotel News Now’s coverage this year on the U.S. hotels transaction landscape.
Picking Up the Pace
Overall transaction volume was down through 2020 as owners were looking to hold on and avoid distressed sales as much as possible. Because the wave of distress didn’t arrive in 2020, many were expecting it to hit this year.
Overall, industry experts at the start of the year were expecting both the number of deals and the transaction prices to increase from 2020’s lows. Eric Guerrero, managing director and head of HVS’ brokerage and advisory division, said during a Hotel Optimization online panel that “the spread between the buyers and sellers [will] slowly start to compress, and we’ll see way more deals happening this year than last.”
Through 2020 and into 2021, both private buyers and state governments were interested in buying older hotels, particularly extended-stay properties, and converting them to other uses, such as affordable housing or assisted living.
Many of these deals took place in California, in particular, as part of the state government’s Project Homekey. Though the full numbers aren’t in yet for 2021, Atlas Hospitality Group President Alan Reay found that the state's overall hotel room supply decreased in 2020 because of stalled new hotel development and the extra boost in hotel sales from Project Homekey.
“There's no question this has had a huge impact on hotel sales in California, and that's the reason that, from my statistics, we are the only state that shows an increase in the number of sales, not a huge decrease,” Reay said.
Aggressive Competition
Investors waiting with capital to spend decided to pursue other hotel deals. All of that competition for sales cut into the hoped-for discounts and even drove up prices beyond pre-pandemic levels.
“That doesn't mean that the prices are not discounted, but it does mean that the expectation of the discount is not being realized,” said Anne Lloyd-Jones, senior managing director and director of consulting and valuation at HVS. “If you thought you could get something for 30% off, maybe you're getting it for 20% off because that competitive stimulus is driving the market.”
By the halfway point of 2021, California's hotel transactions market set new records for the number of deals made as well as dollar volume. The 59-room Alila Ventana Inn & Spa in Big Sur sold for more than $2.5 million per key, a new record for the state.
“I've never seen a stronger seller's market than what we have right now,” Atlas Hospitality Group’s Reay said.
As the competition for deals heated up, buyers got more aggressive, further driving up valuations even as some hotels were being sold at auctions. Mike Cahill, CEO and founder of Hospitality Real Estate Counselors, said it was interesting to see the number of hotel deals coming in at or above 2019 prices even while the COVID-19 delta variant was spreading.
“There’s something I think you probably wouldn’t have anticipated me telling you six months ago,” he said.
In an analysis of second quarter hotel sales, Jan Freitag, senior vice president of lodging insights at STR and national director for hospitality market analytics at CoStar, wrote that the volume of hotel deals was a clear indication of investor confidence in the sector. STR is CoStar’s hospitality analytics firm.
“Hotel sales volume in the second quarter speaks to this ability of buyers to underwrite future earnings based on a longer historical perspective, disconnected from the poor results of the last 18 months,” he wrote.
As the end of 2021 approached, industry leaders were still talking about all of the pent-up capital pursuing hotel deals. At the NYU International Hospitality Industry Investment Conference, Ashford Hospitality Trust President and CEO Rob Hays said the money raised for hotel deals could be the most equity capital ever to exist in the hotel industry.
“Everybody and their grandmother has raised a $5 billion equity fund,” he said. “It’s unbelievable. I’ve had conversations ... over the past several months where literally every one of them is, ‘I just raised a $6 billion fund; I just raised a $7 billion fund; I’ve got to get this money out.’”
REIT Activity
After a rough 2020 for all hotel owners, industry analysts expected more transactions in 2021, including some mergers and acquisitions. Analysts didn’t think public-to-public deals were likely this year for hotel real estate investment trusts, but public-to-private was definitely a possibility.
“Cash flows are still negative and stock prices have moved up pretty significantly [at the end of November and into December], but as the debt market improves and more capital is available … depending on where the stock prices are, depending what people's view of fundamentals is, that might actually be a more likely outcome to getting fewer REITs than public-to-public [mergers and acquisitions],” said Michael Bellisario, director of equity research and senior analyst at Baird.
Throughout 2021, hotel REIT executives spoke about their hotel acquisitions and dispositions and explained their appetites for further deals. Hotel News Now compiled their comments from fourth quarter 2020 earnings calls as well as first, second and third quarter calls in 2021.
During his company’s third quarter call this year, Host Hotels & Resorts President and CEO Jim Risoleo said, “The deals that we've been able to get done this year have been off-market transactions, and that's where we continue to stay focused right now. Because there is a fair amount of competition out there, given that the debt markets are flushed with cash, the CMBS market in particular flushed with cash, and a lot of the private equity firms were sitting on the sideline waiting for the CMBS markets to come back. So, we are starting to see more competition.”