An active investment sales market is vital to the health of the hotel ecosystem.
Transaction velocity drives property reinvestment through change-of-ownership property improvement plans and buyer-driven, value-enhancement strategies. A larger set of real-time transaction data provides critical market intelligence for stakeholders to make informed capital allocation decisions and advisory recommendations. Transactions typically create opportunities for sellers to realize returns while allowing buyers to deploy capital for the potential of wealth generation. The indirect impacts of investment sales activity are also noteworthy. Being a part of transactions is not only valuable learning experiences for the participants — particularly younger team members — it’s filled with excitement and often comes with stories carried around for years.
However, today's hotel investment sales market is anything but vibrant. The current environment has shifted hotel owners from an offensive posture — where they could realize strong returns and redeploy capital — to a defensive stance focused on managing challenging exit scenarios.
The fundamental challenge stems from the dramatic shift in monetary policy. For nearly 14 years preceding March 2022, the U.S. Federal Reserve’s interest rate policy resulted in average nominal Fed Funds Effective Rate of 0.51%. This prolonged low-interest environment incentivized investment over savings, with real estate sectors capturing substantial capital inflows. Hotel assets were underwritten and valued based on those historically low rates over those 14 years.
The Federal Reserve's subsequent rate expansion campaign fundamentally altered market dynamics. Today's buyers logically base their underwriting on current interest rate levels, resulting in valuations materially below the exit prices originally anticipated by existing owners. This divergence has created the persistent bid-ask spread that characterizes today's investment sales market.
Current hotel owners face a rational but challenging decision framework. In typical hotel investment underwriting, asset sale proceeds represent 50% or more of total equity returns. When actual sales prices deviate materially from underwritten exit values, sponsor and investor returns fall substantially below expectations — potentially eliminating returns entirely.
This dynamic creates cascading consequences beyond immediate financial impact. Realizing below-expectation returns, even when driven by macroeconomic forces beyond management control, can impair a sponsor's ability to raise equity for future investments. While nuanced, sponsors generally enhance fundraising prospects when prior investments demonstrate strong performance. This creates a feedback loop where current market conditions potentially constrain future investment capacity.
The decision to sell extends beyond investment returns and future fundraising. Hotel assets generate ongoing revenue streams for sponsors, including property management fees, third-party equity management fees and asset management fees. These revenues support property and investment management organizations' operational infrastructure. Selling assets results in the loss of that revenue. The risk of being unable to replace revenue streams within reasonable timeframes creates additional pressure on hotel owners' ability to maintain organizational capacity and support their teams. This risk increases with fundraising difficulties and limited transaction opportunities.
Despite these challenges, hotel fundamentals remain reasonably strong to support manageable debt loads and service interest coverage. This stability has prevented lenders from becoming a forcing mechanism in the transaction market, providing owners with time to develop thoughtful approaches rather than face immediate distressed sale scenarios.
Hotel sponsors are engaging in complex discussions with their investor groups to determine optimal paths forward. These conversations involve unwinding investments made under fundamentally different economic conditions while preserving relationships and future opportunities for all parties. The complexity of these discussions — often involving multiple stakeholders with varying interests and timelines — naturally extends decision-making processes involving asset sales.
With over 1,000 hotel ownership groups likely engaging in similar strategic conversations, the cumulative effect creates significant market friction. Each group must process a situation that was largely unforeseeable when initial investments were made and that no sponsor could have reasonably controlled.
While the persistence of the bid-ask spread is frustrating, seller behavior reflects rational economic decision-making given the constraints and consequences outlined above. The timing of the transaction market's recovery will ultimately be determined by the outcome of thousands of opaque investor conversations being had by thousands of investment sponsors. Market participants have been actively engaged in these discussions and are methodically working through these complex situations. As stakeholders continue navigating from the old interest rate era to the current environment, the investment sales market will gain momentum; in other words, transactions beget transactions. Eventually investment sales velocity will revert to a normalized level for the benefit of the industry and its participants. Thankfully, the market is already showing signs of progress towards that eventuality.
Ankur Shah is the chief financial officer of Access Point Financial, a $3 billion hotel-focused real estate credit firm.
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