Rising interest rates and a projected recession in the latter part of 2023, however mild, appear to have spooked investors in the hotel space. The total volume of transactions declined to just over $7 billion in the first quarter of this year, according to CoStar Group's transaction data.
That is 55% below 2022’s fourth-quarter transaction activity. Compared to a year ago, the first quarter results are down 21%. Total trading amounts are preliminary as of the beginning of April and may increase as deals that closed before the end of March are reported.
As the year progresses, two opposing market forces will be on display. The expected slowdown in corporate and consumer spending could affect hotel revenues and operating profits. This, in turn, will influence valuations that buyers are willing to underwrite, which could contrast with the values ascribed to properties by sellers.
In such an environment, where the so-called “bid-ask” spread is wide, fewer transactions take place until either sellers are willing to accept a lower price or buyers get comfortable with loftier valuations. A continued disconnect between buyers and sellers has a negative impact on the total sales volume.
However, many debt maturities on hotel properties have been extended from prior years into 2023 and this year may see the end of these recent loan accommodations. Hotel owners who need to refinance their debt may be forced to accept new debt at a much higher interest rate.
Some may decide that the economic uncertainty, together with the higher rates, may not be the highest and best use of their capital and may try to sell their asset to unlock value or gain access to cash to support other properties in their portfolio. This activity would have a positive impact on sales volume.
The timing of Silicon Valley Bank's closure on March 10 and the related turmoil in the small and regional banking sector likely only had a small impact on the quarterly sales volume. But going forward, access to financing from these regional banks may be ever harder to come by, especially for deals involving smaller, limited-service hotels. This could put an additional hurdle for buyers in place and further diminish the number of hotel sales in 2023.