Lack of conviction among buyers slows US hotel deals pace

The ramped-up transaction market predicted for 2025 has yet to appear, and there are questions whether it will at all.

The pace is slower than many optimistically believed it would be, but hoteliers were still making deals through the first five months of the year, and they’ll continue to at cautious speeds.

The baseline from the capital markets has been solid, so the debt markets remain liquid, said Dan Peek, president of JLL Americas Hotels & Hospitality. There’s been some fluctuation in fixed rates as the U.S. Treasury markets have bounced a bit, and on the floating-rate side, credit spreads have moved a bit. But the market stayed open.

“We did not have a situation where the market has shut down or anything along those lines,” he said.

JLL’s U.S. Hotel Investment Trends report released in early May shows first-quarter transaction volume was up 23% year over year with $4.6 billion in deals closed. Deals below $50 million made up 47% of the transactions tracked while those between $50 and $199 million made up 40%.

The thing to keep in mind, however, is that these numbers reflect deals that closed in the first quarter, meaning they were baked in the first quarter of 2024 or earlier, Peek said. The transaction data here is backward looking.

The story now, as it has been for a while, is the varying degrees of conviction on the buyers’ side, he said. People aren’t sure where to make their bet and what kind to make. Some are sitting on the sidelines. Others are fairly tepid, but they’re at least participating in the market.

“So, we're in another price discovery phase,” he said. “Are we going to have interest rate relief? Is that [lower] consumer and corporate confidence going to find its way into performance and result in lower performance and, as a result, lower pricing?”

People are still bidding on hotels, but probably on the margin about 10% to 15% fewer bids on the average deal, he said. Capitalization rates are up a bit because of uncertainty more than anything else.

“I think it's more function of they've taken their underwriting down a little bit because of uncertainty and a result pricing — hotels are a pro forma exercise,” he said. “It's always about what can I do with the hotel going forward, not solely what it's doing today.”

The buy side is more cautious right now, and it’s not for lack of access to capital through discretionary equity or credit, said Dustin Fisher, senior vice president of investments at Noble Investment Group.

“It’s purely uncertainty,” he said. “Trade policy, government spending, international travel — you can take your pick.”

Even so, the industry’s fundamentals haven’t reflected those to justify the pullback, he said. The results from Noble's market research show a different story.

“We’re looking at real-time performance, we’re looking at pace, we’re looking at forward bookings, and we really don’t see this stark erosion that I think you’re seeing getting characterized in the marketplace right now with exceptions for specific markets that experience them more acutely than others, but there’s none that we don’t feel comfortable quantifying around in our underwriting,” he said.

Some buyers are waiting for a perfect level of clarity, which isn't practical in lodging, he said.

"People that have a lodging mandate will ultimately look back at this period of stagnation and transaction activity as a time they likely missed good buying opportunities,” he said.

There’s a strong bifurcation in the transaction market, said Brian Waldman, chief investment officer at Peachtree Group. The smaller properties, those under $20 million, continue to be fairly liquid with a more competitive process and reasonable pricing. Much of that is the result of local lending relationships and Small Business Administration loans.

“There's just also a lot more liquidity in that space,” he said. “There is clearly capital on the sidelines that's looking to be deployed.”

There’s appetite for solid hotels with cash flow in place, but those with more of a story lose their attractiveness, he said. The hotels that lean on discount to replacement costs or a value-add story are experiencing more punitive pricing.

Individual sales are trending over portfolio deals as there’s no portfolio premium, which has as much to do with the debt capital markets as the general uncertainty around tariffs, geopolitical concerns, the Department of Government Efficiency cuts and other cutbacks, he said. Groups that were starting to be more active are backing off again.

“I think we’re seeing a little bit of cooling of the market in the last 60 days,” he said. “As for the rest of the year, I think a lot really depends on what happens in the world over the next 60 or 90 days.”

Earlier in the year, he would have predicted transaction volume to pick up in the third and fourth quarter, Waldman said. Now he’s not sure if that will happen this year or if it will be in 2026. The expectation is that interest rates will stay higher for longer, and one of the questions now is whether lenders are ready to lend and equity is ready to take the leap.

“Or are they waiting for the headlines and the volatility to settle a little bit before they start making investments?” he asked. “It's hard to say when that's going to happen. But you still have this major wall of maturities, close to a trillion dollars this year.”

The can will be kicked on some of the debt, but the industry is reaching a point where it won’t cover all of it, he said. Owners who have managed to hang on will be forced to do something regardless of whether they like the value.

Noble looks at potential deals as yielding or non-yielding hotels, Fisher said. The yielding hotels in performing markets aren’t getting any cheaper, and the buy/sell/hold analysis will always say defer to holding the cash flow rather than selling at an unnecessary discount.

In the bid-ask spread conundrum the hotel industry has been experiencing, the bid valuations have widened but the ask hasn’t changed, he said.

“The ask is flat,” he said. “We expect it to stay that way — if not tightened back somewhat when the big, larger-yield buyers ultimately return when they feel like they put enough time in the rearview from this [second-quarter] shock of macroeconomic uncertainty.”

The non-yielding hotels are a bit different, Fisher said. Owners with broken physical properties, broken partnerships, fund-life issues or maturity risks are behaving more like market sellers.

He added that "the current macro uncertainty is probably the final nail in the coffin for that," and is pushing owners to go ahead and sell these types of properties.

This is where the valuations will get a little cheaper, he said. However, they can’t orient it to a capitalization rate of 25 or 50 basis points because they’re inherently broken hotels, operationally or physically, at the outset.

Peachtree is always out there with a strong appetite for deals, Waldman said. What differentiates it from other owners is that it invests across the capital stack. It does a lot of structured transactions, giving it the ability to pivot based on where the opportunities are.

“I anticipate that we will have a very busy back half of the year across the platform,” he said. “We’re definitely most active on the credit side, on the lending side of our business, but we continue to acquire hotels as well. It’s just a lot harder today, and there are fewer opportunities that we think make sense.”

Waldman said that on the lending side of its operations, Peachtree is active in three categories: refinancing, acquisition and new development.

“I look at everything on a risk-adjusted basis, so we’re out there and we’re active — it’s just a matter of making sure that we’re pricing the risk correctly for the opportunity,” he said. “I would say today we’re probably most busy with recap and with construction lending, although we are doing a decent amount of acquisition funding as well.”

The refinancing environment is more expensive than it was years ago, even after two interest rate drops in 2024, but some owners will have to refinance.

People typically go to a bridge lender or a debt fund to get from Point A to Point B and then after executing their business plan, they would sell the hotel or refinance it in the permanent market with bank debt or commercial mortgage-backed securities debt, Waldman said. A lot of what it’s doing today is bridge to bridge, where someone had a business plan but they haven’t quite executed it yet and they need more time while their debts are coming due.

“We're giving them more runway so that way they can finish the business plan, and then go back to the permanent market,” he said.

Noble is never out of the market, Fisher said.

“If you’re out of the market, that would mean you’re trying to time the market, and that’s just not a philosophy that we subscribe to,” he said. “We adjust outlooks and how we underwrite, but we are opportunistic at the end of the day and will always be active in the transaction market.”

Just last week, Noble announced it acquired 16 Woodspring Suite hotels through two portfolio deals.

It’s human nature to respond to a shock like the hotel industry saw in the second quarter to stop and wait for more clarity, Fisher said. However, because the fundamentals haven’t eroded as much as expected, as the year progresses, hoteliers will find more stabilized footing.

Waldman said he believes lenders want to clean up their books and get back into the lending business and out of the workout business. However, with roughly $1 trillion in maturities coming up, some of those loans will get extended.

“I don’t think you’re going to see all of that get called,” he said. “I don’t think you’re going to see a market implosion, but I do think that you’ll see lenders start pushing where they can to get payoffs, whether that’s through a refinance or through the sale of an asset.”

Last year, regulators started to bear down on the banks, which forced them to take more aggressive positions with borrowers and start selling notes to move some of that paper, he said.

“With everything going on in the market today, that's loosened up a little bit, but at the same time, I think the banks are looking to figure out ways to get repaid, to get this off of their books so they can recycle capital and start lending again in a more profitable manner.”

Debt is generally available, but the industry has had to adjust to a different interest rate environment since 2022, Peek said. While not historically high, at 7% to 10%, they’re above the 3%, 4% and 5% rates seen since the Great Recession.

The banks are active, but some are at capacity, particularly at the regional level, he said. Still, some of the regional banks are more competitive than they used to be. The debt funds, another option beyond the banks, insurance companies and commercial mortgage-backed securities lenders are a big part of the business.

One dynamic at play in the CMBS market having the single asset single borrower market open was the SASB refinancings freeing up capacity for the big balance sheet lenders, he said. Those major banks were able to start lending again because they were paid off in a substantial way. The core CMBS conduit market is functioning, and there’s good demand for it as well.

The big players, such as Blackstone and Brookfield, have been investing in life insurance company platforms, creating hybrid vehicles, he said.

“I would say, but for the fact that SOFR is as high as it is, and Treasuries are as high as they are, it's a very good, functioning market,” he said. “Would we like them to be lower? Sure, but they're not abnormally high, long-term history. They're abnormally high when we think about the world since the [Great Financial Crisis].”

Click here to read more hotel news on CoStar Hotels.