The takeover of MGM Growth Properties and its 15 properties on the Las Vegas Strip and elsewhere by Vici Properties for $17.8 billion led the nation's hotel transaction volume to skyrocket to new heights of $25 billion in the second quarter.
In the deal, which was announced last summer and closed in April of this year, Vici leased the buildings back to MGM Resorts International for 25 years and an initial annual rent of $860 million, subject to escalation clauses. The acquisition pushed second-quarter transaction volume to the highest quarterly trading activity ever, approximately $10 billion higher than the first-quarter sales total.
The closed transactions in the quarter were completed before the Federal Reserve increased interest rates, and before the continued threat of a “hard landing” for the U.S. economy. Without the Vici transaction, a decrease in total volume was already visible, with only about $8 billion of hotel assets sold, which represents just over half the first-quarter volume.
Industry watchers expect a further deceleration for the remainder of the year. Debt market participants are still absorbing the news from the Fed and anticipate further interest rate increases as the year progresses. This makes the cost of financing more uncertain. Potential buyers looking for loans will have to contend with higher borrowing costs and a need to reassess their underwriting assumptions.
Higher interest rates will make the refinancing of debt coming due the remainder of the year more expensive for borrowers. This could lead some owners to reassess their willingness or ability to make higher monthly interest payments and instead put their property on the market. So, while the higher debt costs are a headwind to overall transaction volumes, it might also spur some activity.