LOS ANGELES — The pace and high prices of hotel transactions in 2021 were the result of investors waiting through the worst of the pandemic to deploy pent-up capital.
Much investment capital raised in 2020 was targeted at hotels, but amid the uncertainty of the COVID-19 pandemic and the hotel industry recovery, there wasn't enough confidence for many investors to pull the trigger, Jared Kelso, executive managing director at Cushman & Wakefield, said during the “Acquisitions Track — Valuations” panel at the Americas Lodging Investment Summit.
Now, as the the pace of the hotel industry's recovery becomes more apparent, investors who were looking at other real-estate classes, such as industrial, are instead reconsidering hotels, he said.
“You start thinking of life insurance companies, and a lot of them moved away from the hotel space after the great financial crisis,” he said. “They can’t keep doing 3-cap industrial yields forever. We think not only is there a lot of capital already poised to jump, but there’s a lot of capital coming in.”
Kelso said the high number of investors with $1 billion or more in capital to deploy “blows [his] mind,” noting it wasn’t long ago that a $300 million fund was considered big.
RLJ Lodging Trust was an active seller in 2019 as the company looked to reshape its portfolio, said Kate Henriksen, co-chief investment officer at the hotel real estate investment trust. Fortunately for RLJ, it still had a lot of the proceeds from those sales on its balance sheet at the beginning of the pandemic, she said. While the company didn’t get traction in 2019 or 2020 on acquisitions, it became active in 2021.
She said the company bought three hotels last year that were consistent with its strategy: the Hampton Inn & Suites Midtown Atlanta, the AC Hotel by Marriott Boston Downtown and the Moxy Denver Cherry Creek.
“Those are the types of assets that I see ourselves acquiring in the future, this year and the next,” she said.
The internal review process and underwriting stage are dependent on the individual hotel and market conditions, including demand trends and whether it has recovered to 2019 performance levels or better, she said.
RLJ has bought and sold large portfolios in the past, Henriksen said.
“There’s definitely something to be said from gaining that scale, being able to acquire 20, 30 or 100 hotels in one fell swoop versus the onesies and twosies to get to that scale,” she said.
When a hotel becomes available that checks the right boxes for investors, it captures their attention because of the lack of product on the market, Kelso said. At the same time, some owners are asking if they should wait for cash flow to catch up or if they should put a hotel on the market because there’s not much else out there.
While the answers were a bit more nuanced, he said generally “the more eyes on a deal translated into more value 90% of the time.”
The bidding process now is frustrating many would-be buyers, who are going into third and fourth rounds of bidding, he said. Fifteen years ago, bids would go two rounds and the deal would be done.
Historically, hotels have been the riskiest asset class, said Luigi Major, managing director at HVS. Now, he said, he wouldn’t want to be invested in any office building because of all the remote work happening. In turn, hotels are becoming more attractive, and that’s part of what’s driving valuations as buyers are flooding the market with capital to diversify portfolios.
At the beginning of the pandemic, everyone thought business transient demand would come back sooner than group demand, but the inverse appears to be true, said Benjamin Young, vice president of asset management at AEG. By the third quarter of this year, group business will be back, and business transient will be back by 2023 or 2024, he said.
Some business transient won’t come back, but because more people are working form home, there will still be a need for smaller meetings, Young said.
“A decrease in business travel will be offset by more smaller meetings,” he said.
Many investors also see hotels as an inflation hedge, he said. While he agrees with that over the long term, in the immediate future Young said it’s important to remember that interest rates generally are higher than inflation.
“If we are really going to start experiencing 7% inflation, then we're going to start to see much higher interest rates than what we’re seeing right now,” he said. “Then what is the impact of that on asset value?”