PO Box 1212
Tampa, FL 33601

(727) 726-8811
(813) 258-5827
Toll Free 1-888-683-7538
Fax (813) 258-5902

Click For A FREE Quote

Updated October 2023


Hotel sales market remains weak, but interest-rate cuts, lenders may spur more deals later this year
By Ashley Fahey
Tampa Bay Business Journal
Published: Apr 1, 2024

Like much of the commercial real estate market, sales of hotel properties remain largely frozen in the wake of higher interest rates.

After only $14 billion in deals nationally were completed in 2020, deal volume picked up to $42 billion and $52 billion in 2021 and 2022, respectively, according to CoStar Group Inc. (Nasdaq: CDGP). Last year, that sum fell back to $24 billion.

But Jan Freitag, national director for hospitality market analytics at CoStar, said he and others in the industry expect sales volume to pick up in the second half of this year. That's in part because of wide expectations the Federal Reserve will begin cutting interest rates later this spring or summer, but also because as loans on hotels mature, it's forcing lenders and borrowers to make decisions about the future of individual properties.

"The process of taking over a hotel and foreclosing is in nobody’s best interest," Freitag said. "There are some pretty harsh conversations between lenders and borrowers. The banks don’t want the keys but they want the loan off their books so they can continue to lend. That might also precipitate more deals [in the latter half of this year]," he said.

The commercial mortgage-backed securities delinquency rate for hotels has inched up each month since October, going from 4.76% that month to 5.45% in February, according to Trepp LLC. That's slightly higher than the overall CMBS delinquency rate of 4.71% in February, but lower than retail's 6.03% delinquency rate and a 6.63% mark among tracked office properties that month.

After lodging got "absolutely creamed" during the pandemic, the sector's delinquency rate saw a big drop but is starting to creep back up, said Stephen Buschbom, research director at Trepp, during a recent Trepp webinar. That growth may be because of what Buschbom called expense creep and owners only having so much pricing power when it comes to hotels' nightly rates.

"That combination, especially if you have floating-rate [debt] in here, is going to hurt at this point in the cycle," Buschbom said.

Freitag said he feels the current hotel delinquency rate — hovering around 5% and 6% in recent months — is nothing to write home about. But instead of an insurmountable wall of distress, a more likely scenario is lenders will want to be proactive about selling hotel properties that could face issues — as a way to get them off their books.

Like other commercial real estate sectors, it's taken a while for buyers and sellers to align on pricing expectations, Freitag said. Specific to the hotel sector, there were expectations during the pandemic — and significant capital raised in anticipation — that there would be sizable price cuts on hotels because of how significantly those properties were hit.

That didn't end up happening, Freitag said, so prospective buyers and sellers alike have had to get more realistic about pricing.

"There's a lot of money and funds out there eager and willing to make a deal and step into luxury hotels or portfolios of limited-service hotels in Southern or Sun Belt markets," he said.

Slow but steady hotel growth expected in 2024

CoStar is forecasting U.S. hotel occupancy to reach 63.6% this year — up slightly from 63% last year — and average daily rate and revenue per available room to grow 3.1% and 4.1%, respectively, over last year.

Freitag said a bifurcation of the American consumer is emerging in which the upper end continues to want to spend — which is driving RevPAR, occupancy and ADR among top-tier hotels. Meanwhile, RevPAR for the economy hotel market declined last year and, as of February, was down 6.3% year over year. Luxury hotel RevPAR was up 4.9% on a yearly basis in February.

In January, overall hotel room demand fell 1% compared to the same month a year prior, although short-term rental demand grew 1% in that same period, according to data from the U.S. Travel Association.

As a whole, the hotel market remains slow and steady, Freitag said, with CoStar particularly bullish on group-travel growth, a sentiment recently echoed by top executives at major hotel chains.

Chris Nassetta, president and CEO of Hilton Worldwide Holdings Inc. (NYSE: HLT), said during the hotelier's fourth-quarter earnings call on Feb. 7 that group RevPAR outperformed expectations, growing 6% year over year in Q4 and up 8% from 2019. He attributed that growth to an uptick in small company meetings and convention demand.

Nassetta also said during the call 2024 group positions are up 16% year over year, with small company meetings increasing as a percentage of that mix.

Tony Capuano, president and CEO of Marriott International Inc. (Nasdaq: MAR), said during his company's Feb. 13 earnings call that group travel comprised 23% of room nights in the fourth quarter and, compared to Q4 2022, revenue in that segment grew 9% globally and 7% in the U.S. and Canada. Additionally, at the end of 2023, full-year group revenue for 2024 was pacing to be up 13% globally and up 11% in the U.S. and Canada on a year-over-year basis, Capuano said.

Group room demand in January within the top 25 U.S. markets grew 9% year over year, according to the U.S. Travel Association.

In some downtowns, though, people still aren't back to the office as regularly as in 2019, and that's continuing to have an impact on corporate transient travel in those areas. Still, Freitag said, one boon to the hotel market from more hybrid or remote work is an uptick in short meetings and bookings for those not-in-person teams to meet.

On the leisure side, much of 2023 was dominated by outbound international travel, prompting questions of whether Americans will once again vacation abroad this summer instead travel domestically, Freitag said.


Copyright 1999-2024, Appraisal Development International, Inc