ATLANTA — Hotel owners are coming to terms with the possibility that U.S. economic conditions might not improve before they need to sell one or more of their properties.
Speakers at the Hunter Hotel Investor Conference weighed the recent wave of market volatility, the possibility of a U.S. recession and what could jump-start a slumbering hotel transactions market.
Robert Webster, vice chairman of CBRE, said hotel pricing expectations are falling "back to the norm."
"We were on a 15-year sugar high. On a sugar high, two things happen: You’re excited and you're fat. So now we're on a low-carb diet, and we’re going back to where we all started," Webster said. "Because these interest rates are much more in line with where they were prior to 2007 when the interest rates started to go down, but that means that the value of my asset has diminished, and I don't want to admit that the math is the math. You can't escape that."
Greg Friedman, managing principal and CEO of Peachtree Group, said he expects a challenging 2025 given a number of headwinds in the U.S.
"That's probably the toughest part is all the new policies, what the new administration is trying to accomplish with tariffs," Friedman said. "I mean, they're factors that could potentially drive us into an economic recession, which isn't necessarily a bad thing, because it could help bring rates down. But some of that challenge is the volatility is ... going to make it really tough to operate in this type of environment."
Friedman predicted hotel investors might have to wait a bit longer for the transactions market to open back up.
"We're probably going to continue to be in this higher-for-longer interest rate environment. That's going to make it very tough," he said. "The flip side, at some point, I think you're going to see the transaction market open up for us to be able to go buy assets. And that's what gets us excited, given the fact that everyone's dealing with these higher interest rates, they need to renovate assets. I think that's going to create a buying opportunity for us."
This month, former U.S. Treasury Secretary Larry Summers issued a more negative outlook for the U.S. economy, raising the odds of a recession. Webster said that prediction is a little worrying.
"I don't think we're going back to low interest rates anytime soon. Maybe on the short end but not on the long end," Webster said. "The most disturbing thing we heard this last week was Larry Summers, the economist — pretty well-respected and he's a fairly balanced thinker — he said that because of all the turmoil of the last month or so that he's upped his probability of recession at 50%."
Hurdles to hotel deals
U.S. hotel transactions have been down for two straight years after peaking in 2021 and 2022, said Dan Peek, president of JLL Hotels & Hospitality Group. The types of hotels that did trade were select-service properties with better operating margins that recovered demand lost during the COVID-19 pandemic much quicker, as did resorts and certain markets such as Nashville, Tennessee; Austin, Texas; and Savannah, Georgia. Hotel-focused investors such as Host Hotels & Resorts, Sunstone Hotel Investors, Trinity Investments and Certares stayed active even during this quiet transactions period, Peek added.
But full-service hotels with restaurants and large meeting and convention space haven't been trading as much, Peek reminded the audience. He cited the private-equity investors that typically buy these types of larger hotels have spent their capital elsewhere.
"What you didn't see, and you still haven't seen, is the big mixed-allocation private equity be active, right? The Blackstones and Brookfields to start with, etc.," he said. "And why? Because they like something else better, right? They're very active in data centers. They're very active in industrial, they're active in multi-housing, and on a risk-adjusted basis, they like that product better."
In the past few years, large full-service hotels have aged and are in need of serious renovations, which has also slowed transactions way down.
"They're very much relying upon financing, because a lot of it's private equity, and they're just not there. A lot of those assets where the [property improvement plan] used to be $30,000 a key, and now it's $75,000 a key, and they're late-cycle recovery, so they don't really have the higher cash flow select-service assets have," Peek said. "They've been illiquid, and that's really been the challenge, and that is where that big private equity plays most frequently, in both portfolio and single-asset [deals]. And I would say that's the hardest thing to get done in the market today. And it's purely a lack of conviction amongst that private equity class, that mixed-allocation private equity fund."
Hotel investment opportunities
The U.S. hotel transactions market will eventually shake loose with investment opportunities, Friedman said. Until then, investors will need to get creative to make deals pencil.
"There's going to be an opportunity set there on the equity side, or even just buying assets at a better valuation than what we saw pre-2022 just given the fact that values have truly dropped, and there'll be some motivating factors," he said. "But for [Peachtree] as a firm, we're very heavily invested in credit across commercial real estate, including hotels, and hands down, I think that's the area of growth for us."
In 2024, Peachtree Group deployed $1.6 billion in credit transactions, providing financing to hotels, multifamily, industrial and specialty properties.
"We've always been in credit, going back to 2010. But in the first quarter of 2022 as rates were starting to move, nothing really made sense from a transaction perspective, and we really just doubled down onto the credit side," Friedman added.
Regardless of all the volatility and uncertainty, Teague Hunter, president and CEO of Hunter Hotel Advisors, encouraged hotel owners and investors to be decisive and make a deal.
"I do think today's a great time to be buying," Hunter said. "For the last two years, I was like, 'I don't know when the bottom is, it's not coming.' But it's feeling like one right now. So I do think this year's going to be a productive transaction market. And I think next year is going to be a really productive transaction market."
Hotel investors might pine for the busy transaction years of 2021 and 2022, but Webster said now is still an ideal time for hotel investment as the markets will "balance back to the fundamentals."
"If you go back in time and you look at those trades that were made, a lot of those trades have turned out, in hindsight, not to be great trades. ... Right now, there's so many levels of inefficiency that create a lot of question marks as to whether I should be investing or not investing," Webster said. "And if you go through the periods of time in our careers where the best deals were made, it's when the markets are highly inefficient. So you get a much higher multiple, but you're also taking a considerable amount of risk because of the noise."