During the first half of 2022, hotel transactions in the U.S. totaled several billions of dollars as buyers were eager to capitalize on the industry’s recovery from the COVID-19 pandemic.

Inflationary pressures and the Federal Reserve’s interest rate hikes have since dampened that eagerness as would-be buyers contend with overall rising prices and, in particular, the rising cost of debt.

That said, there remains a high level of interest among all types of investors in hotels as industry performance heads back to, and even surpasses, 2019 levels.

The LW Hospitality Advisors survey of major U.S. hotel sales in the first quarter reported 128 single-asset transactions valued at more than $10 million for a total of $7.9 billion. Those deals comprised approximately 26,000 hotel rooms with an average price per key of $306,000. The 2021 first-quarter survey reported 31 comparable single-asset deals for a total of $8.1 billion, representing about 17,000 rooms at an average price per key of $477,000.

The survey also excludes the sale of the Venetian Resort Las Vegas & Sands Expo and Convention Center that was announced during the first quarter of 2021. Minus that deal, the first quarter of 2021 saw 30 comparable trades totaling $1.85 billion with 9,900 rooms with an average price per key of $187,000.

Comparing the first quarter of 2021 to 2022, the number of hotel deals increased more than four times, as did the total dollar volume, while the average price per key grew by about 65%.

The survey recorded 133 single-asset sales with prices of more than $10 million in the second quarter of 2022. Altogether, these transactions amounted to about $5.3 billion and included approximately 21,200 hotel rooms with an average price per key of $248,000.

The survey recorded 60 single-asset sales over $10 million for a total of $4.7 billion and 14,000 rooms. The average price per key was $331,000.

Compared to the first quarter of 2022, there was a 122% increase in the number of deals and a 12% increase in total dollar volume, while price per key dropped by 25%. In the second quarter of 2019, there were 35 comparable hotel deals totaling approximately $2.6 billion with 9,100 rooms, at an average price per key of $286,000.

Overall, the number of hotel deals over $10 million in the first half of 2022 was more than three times the volume over the same period of 2021. The total dollar volume of these deals doubled from one year to the next, and the average price per room increased by about 2%.

“The bottom line is that the transaction activity is still extremely robust. Value rebounded dramatically,” Daniel Lesser, president and CEO at LWHA, said. “But there’s a little bit of a pause that’s starting to take place in the market right now, obviously, because of the change in interest rates and debt parameters.”

That’s also translating to a slowdown in rebounding valuations and possibly even a small downturn, he said.

There’s a been a mix of buyers and buyer types, with companies such as Blackstone, Driftwood Capital, Singapore’s GIC, Host Hotels & Resorts, Pebblebrook Hotel Trust, MCR and Starwood Capital Group among the active deal-makers.

“A lot of these folks are on both sides of the equation,” he said. “They’re recycling capital. They’re on the buy side, they’re on the sell side, but at the end of the day, you clearly have a whole host of institutional investors, many of whom are laser-focused on the lodging sector as opposed to being part-time lodging investors.”

Transaction values have stayed relatively constant through the first half of the year, said Eric Guerrero, managing director and partner of brokerage and advisory at HVS. Values may cool off as interest rate increases affect financing, but likely not significantly, he said.

“What’ll end up happening is if interest rates go higher, yields will go down, which means pricing will get impacted,” he said. “I still think the values will be fine, and in most cases, values were almost fully recovered,” he said.

It’s interesting to see that full-service hotels have started to trade, he said, noting resorts continue to be a big deal for investors.

If business travel comes back, the resulting improvement in performance at the bigger full-service properties will draw in more buyers, he said. Those deals also have more value-add components compared to resorts, which generally are fully priced and valued higher than they were three to four years ago.

Limited-service hotels continue to dominate volume of hotel deals, and the premium-branded properties in the major metros and secondary markets continue to receive a high level of interest from buyers.

Guerrero said higher interest rates so far haven't had a noticeable impact on deals valued under $25 million, but the effects are more evident in complex capital stack deals involving different tranches of debt and equity.

In some cases, buyers have been re-trading assets or completely terminating contracts, he said, adding it’s a matter of time before that trend hits the limited- and select-service deals.

In the deals HVS has worked on, it hadn’t encountered any terminations at the time of the interview, he said. However, there have been price renegotiations on several deals.

Limited-service and extended-stay hotels under major brand flags will continue to be attractive targets, but buyers will be a little more conservative in their underwriting, Guerrero said. They’re not going to stretch on price.

Owners looking to sell may need to temper their expectations, he said. That doesn’t mean they’ll need to sell at a much lower price, but they should realize that overbidding and overpaying won’t continue.

Despite the struggles of U.S. urban markets such as New York City over the pandemic, Lesser said he believes fundamentally the notion of urbanism isn’t going anywhere and hotel performance and investment in the major downtowns will rebound.

“When we look back five, 10 years from now, I think [urban hotels are] going to look like good deals,” he said. “It’s going to take a lot of work. It’s going to take a lot of patience and effort.”

The acquisition of the 1,500-room Sheraton Times Square by MCR for $365 million is one such deal, he said.

“On a per-pound basis, you couldn't replicate that hotel for multiples of what they paid for it,” he said. “I think smart money is going into urban downtown, 24/7 cores and also going into big box hotels.”

For an owner, the motivation to sell depends on when they got their hotels, Lesser said. In the first quarter of this year, the outlook for the industry was much brighter than it is now with inflation and rising interest rates.

There are still reasons to sell, though conditions aren’t as good as they were before, he said, noting sellers likely won’t realize the same proceeds they would have just months ago, but it wouldn’t be off by that much.

At the same time, there’s so much equity out in the market, and it’s cash looking for yield, Lesser said.

“With inflation being what it is today, if you’re holding on to cash, literally you’re losing money every single day because of inflation,” he said. “I believe that these equity investors are trying to get the money out.”

Funds raised their capital in anticipation of a pandemic-caused wave of discounts that didn’t happen, he said. That money still needs to be deployed, and it’s under inflationary pressure if it’s sitting as cash. Equity investors will tweak their return requirements downward to compensate for the increase in debt costs.

However, there definitely are deals that will be re-traded and some that will fall apart because of the dramatic increase in the cost of debt, he said.

“Over the next six to nine months, equity is going to have a paradigm shift and be like, ‘OK, well I wish we would have done it in [the first quarter], but we didn't. At the end of the day, we're still sitting on the cash and we're in a high inflationary environment. We’ve got to deploy,’” he said.

Distressed assets never materialized in the way people expected, and they likely won’t ever, Guerrero said. There have been distressed hotels that were auctioned in note sales, real estate owned sales or short sales, but these deals make up a small percentage of the overall transaction market.

“What’s interesting is despite the deals being distressed, the pricing is not,” he said. “We’ve worked on distressed assets, even this year, where the lender has sold it for above the note value, so they actually made some money.”

Emil Iskandar, senior vice president of capital markets at HVS, said for buyers coming in with an aggressive offer without a lot of room to absorb the increasing cost of debt, deals might start to unravel.

“Deals that are priced fairly, the feedback that we’re getting is they’re still able to tweak the numbers and make it work,” he said.

On the acquisition side, there’s pressure to finalize deals, with lenders already pricing in interest rate increases at least for this year, he said.

Because rates are likely to continue rising, most owners won’t refinance existing loans voluntarily because likely the rate they have now is better than what they would get, he said.

“People usually don't refinance unless they have a maturity event,” he said.

It’s more difficult to finance the larger deals involving large institutional lenders and money center banks, Iskandar said. Commercial mortgage-backed securities lenders and collateralized loan obligation lenders are pretty much on the sideline as well.

The local regional banks are still active, however, and that will help to support select- and limited-service hotel transactions, which are likely be the most actively traded for the remainder of the year, he said.

Sean Hehir, president and CEO at Trinity Investments, said there’s a lot of uncertainty in the debt markets, and non-traditional lenders for the most part haven’t been about to move as they don’t have the capacity. Spreads for larger deals on the CMBS markets have widened significantly, by 200 to 300 basis points depending on the asset.

Value-add investors such as Trinity have to figure out how to make investments at every point in a market cycle, he said. The company is currently working on two transactions — one involving seller financing, and the other likely to be a cash deal, he said. It’s acquired six hotels since September 2021

“We’re going to continue, but we just have to be more creative and try to figure this out as we go,” he said.

Trinity had some potential deals it couldn’t proceed on because the spreads widened too much, he said. The increase in spreads is making deals more expensive, so the company is focusing on the markets and asset types it likes, he said.

Trinity has assets that are “performing phenomenally,” he said. It doesn’t have to sell any hotels, and it won’t sell at a discount if buyers try to use the debt markets as an excuse to negotiate.

Along with its presence in the U.S., the company plans to open an office in London and start investing in Europe, and has been active in Mexico. Trinity also has invested in commercial real estate in Japan and is looking to get active in the country again in the next 12 months.

“We’ve built ourselves as a full-service hospitality investor, and if there is a real downturn in the market, that just creates more opportunity,” he said.

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