NEW YORK — High interest rates and a persistent bid-ask gap have kept hotel investors from closing as many deals in the first half of 2024 as they would have liked, but experts say conditions are improving to the point where the transactions market is likely to pick up in the second half of the year.
Speaking during the "Capital Talks" session at the 2024 NYU International Hospitality Industry Investment Conference, Sourav Ghosh, executive vice president and chief financial officer for Host Hotels & Resorts, said pricing expectations have moderated somewhat, helping to close that gap.
"I think that things have come in to a point where we can get comfortable and it does make sense," he said.
Michael Mohapp, principal at KSL Capital Partners, said larger deals are more likely to happen now due to more openness in the commercial mortgage-backed securities market.
"Thankfully, the CMBS market has unlocked transaction activity for larger, stabilized deals," he said.
While the last few years haven't seen a lot of transaction activity, Noble Investment Group was still able to invest $2 billion in hotels across 2022 and 2023 in part by looking for individual owners that weren't getting flexibility from lenders and were struggling with cash flow, CEO Mit Shah said.
As it becomes more likely that there will be fewer interest rate cuts than hoped for in the market in 2024, the pool of motivated sellers could increase in the second half of the year, Shah added.
"Time will help to guide those that are looking to sell, and also those looking to buy," he said.
Timothy Abram, managing director at Starwood Capital Group, said the cost of debt has made it difficult to do the types of acquisitions Starwood likes, which often includes the added costs of capital expenditures, conversions and repositioning assets.
"For those kinds of projects right now, I think it's just quite expensive," he said.
But Abram said there's been a moderation in pricing expectations from sellers and more liquidity on the CMBS markets.
In terms of where the company would like to buy, Abram said Starwood is still motivated by strong supply-demand dynamics.
"We're very focused on where supply growth is going to be muted with good demand growth going forward," he said.
Mohapp said KSL will continue to be focused on leisure and resort-driven markets despite demand softening in those segments.
"We see a lot of opportunity in those markets going forward," he said. "A lot of those markets need [capital expenditures]. They're CapEx-intensive businesses, so there's an opportunity to invest and operate."
Host sees "tremendous value in upper upscale," Ghosh said. He added the REIT continues to look for geographic diversity by investing outside top 25 U.S. markets.
"There's a ton of opportunity across the board," he said.
But there will likely continue to be a disparity in valuations between the hotel industry's underlying real estate and the operating businesses that occupy that real estate, Shah said. He added that in public markets the former is trading at 10 times valuations and the latter is at 16 times.
"That just spells out the [operating company] opportunity that people look to compared to how undervalued the real estate is generally in the public market," he said.
Plus, Wall Street investors are still concerned about "the macro overhang," Ghosh said.
"Until that clears up, I think in the public markets in general, there is going to be a little bit of skittishness and a very short-term focus in terms of being able to create value without necessarily thinking about three years from now or five years from now," he said.
Asked whether the undervaluation could lead to mergers and acquisitions among hotel-focused real estate investment trusts, Ghosh said those are hard to justify; the scale advantages realized by mergers and acquisitions aren't significant enough right now.
"The portfolios would have to be uniquely different where you could get more rate growth potential," he said. "The pure scale advantage and the [general and administrative] savings is not enough alone to make sense."
The profile of hotel REIT investors is shifting as well, with more hedge funds that are focused on short-term returns, Shah said.
"Their short-term views are driven by making a spot trade, a spot bet," he said. "They're not really digging into the opportunity to see the long-term growth prospects."