PHOENIX — Though 2024 wasn't exactly a quiet year, hotel owners and investors believe next year will bring more opportunities for deals and development pipelines.
During the "Owners, Investors and Operators: Opportunities, Challenges & Trends" session at The Lodging Conference, executives shared their outlook on where the transaction market is headed and what they expect to see on the hotel development front.
The hotel industry is moving on to a new cycle, said Kate Henriksen, co-chief investment officer at RLJ Lodging Trust. During the pandemic, there was a flurry of activity from late 2020 through early 2022 before the debt markets turned things upside down.
"This has been kind of the reset," she said. "And now, going into 2025, I think we're going to start into a new cycle."
A frothier deals environment
The market had already priced in the Federal Reserve’s 50-basis-point cut, so there wasn’t a sudden increase in transaction volume, said Ben Rosenbaum, managing director of asset management at Starwood Capital Group.
“I think that interest rates probably still need to come down a bit more for a lot of our peers to really dive headfirst into the market,” he said.
Negative leverage makes it tough to make hotel deals work, and most people seem shy to make a move before the U.S. presidential election, Rosenbaum said.
“I don't know if there's a magic bullet that happens in one day [where] all of a sudden, there's hundreds of hotels in the market, but I do think over the next six months, there are a lot of catalysts that that will spur some of that,” he said.
There are push-and-pull factors at play, said Dave Pollin, founder and president of Buccini Pollin Group. Push is when an owner has a great asset that achieves investment objectives. Pull is loan maturities, capital expenditure issues, brand pressures and other factors out of owners’ control. A lot of owners took on commercial mortgage-backed securities debt between 2012 and 2019, much of which has since been extended.
“It’s getting a bit creaky, so I think we’re going to see a lot more pull, which means a lot more transactions over next 18 months,” he said.
Henriksen said she’s not sure there’s a silver bullet to spur transactions, but once the hospitality industry moves beyond 2024 with the election, potentially two more interest rate cuts and other variables, there should be more activity next year.
The effects of the pandemic aren’t totally gone, said Julie Richter, chief financial officer at Concord Hospitality. Based on market dynamics, there are funds that have held on to hotels for two to four years longer than likely was their business plan. There are capital-strapped properties that made it through COVID, but owners drained their furniture, fixtures and equipment reserves. The global hotel brands were understanding, but now they want those renovations to happen.
“I think that there's a little COVID overhang that's going to put cost pressure on transactions when the timing's right,” she said. “The real question is, when does that happen? Because it seems like some magic thing is supposed to happen and then a bunch of hotels will end up in market.”
Development outlook
Vision Hospitality Group historically has created value through new development, company founder and CEO Mitch Patel said. The company has built more than 60 hotels, and it has another 10 to 12 under development, five of which are under construction. It’s not easy, but the team is bullish on development.
Hotel demand usually follows gross domestic product, and that should hopefully lead to 2% to 2.5% demand growth over the next five to seven years, he said. Supply increased 2% annually on average over the last 30 years, but even pre-pandemic, it wasn’t at 2%. Many pandemic-era projects were delayed, and increased construction costs, land availability and the debt market means less supply growth over the next five years.
“If you’re a developer, we think that bodes really well for development in the next few years if you can get those deals done,” he said.
While hotel construction costs have skyrocketed, and labor in particular will continue to be a challenge, material costs, such as lumber and steel, have come down, Patel said. At the same time, contractors who did not call in recent years because they were so busy before are calling now.
“So what does that tell you? Subcontractors are getting a little hungry now,” he said. “They may be busy now. They’re looking into the future. They’re looking into ’25 — what do they have on the books? They’re looking at ’26, what do they have on the books, and they’re getting a little hungry.”
If owners get a loan done, they’re going to pay a little more construction interest than they would have five to six years ago, but by the time they open the hotel, it will stabilize in a better interest rate environment.
“You’ll be set for success because you’ll be the newest hotel, probably in the market, with the demand supply on your side,” Patel said.
Richter said her company is seeing the same type of cost stabilization demand from the contractors out there. The credit markets feel like they have loosened a bit, even for development deals.
Concord likes the new midscale and economy extended-stay hotel brands coming out because they’re smaller projects that are easier to get financed, she said.
“If you’re looking for a $15 million loan over a $50 million loan, that’s much easier to come by in the marketplace,” she said.
There aren’t many markets out there that can support the cost of new hotel development from a revenue-per-available-room standpoint, Rosenbaum said. The transaction volume over the next six to 18 months will be driven by lender issues and capital-expenditure issues.
Those hotel owners feeling pressure to sell will be doing so well below development and replacement cost, he said. Owners looking at new projects will see they could build a brand-new hotel for $250,000 to $300,000 a key. A 25-year-old hotel, however, may cost $80,000 a key and require about $40,000 to $45,000 a key to refresh it.
“There’s still that disparity between replacement costs in a lot of markets,” he said.