LOS ANGELES — The rapid pace of interest rate increases and uncertainty over an economic slowdown have U.S. hotel owners and investors wondering what that means for deals this year.

Though more challenging, there’s a lot of potential for hotel transactions in 2023, members of the Industry Real Estate Finance Advisory Committee said.

Speaking during the Americas Lodging Investment Summit, these hotel, finance and advisory executives said the pent-up capital is looking for a little more clarity and waiting for the right deals.

Steven Goldman, managing director and head of hotel acquisitions for the Americas at Starwood Capital Group, said the hotel industry had the mother of all shocking events with COVID-19, but demand rebounded quickly. The question now is whether demand will continue to grow and at what rate.

The industry fundamentals are good, and there’s demand for deals from sources of capital, such as Blackstone, Starwood Capital and Noble Investment Group.

“If you just look at the amount of money between the three of us that’s sitting on the sidelines right now, there’s demand to buy,” he said.

Clarity is needed on issues such as how interest rates will affect cash flows, said Larry Kwon, managing director at Moelis & Co. In the first half of 2022, hotel performance was recovering and the cost of capital was still low, so deals were happening.

“We sort of had this momentary shock where suddenly it dawned on all of us that rates were going to go up really fast and it’s going to suck a lot of liquidity out of the system,” he said.

That shock has subsided a bit as hotels continue to perform well, he said.

Catalysts for hotel transactions are available capital and time, Gilda Perez-Alvarado, global CEO of JLL Hotels & Hospitality, said.

She said JLL has been in conversations with hoteliers who need to close a deal by the end of the year, and the clock is ticking. However, she said, many deals that were carried over into 2022 should start to close in the coming weeks.

 
Factors weighing on owners include debt maturity and debt extension tests that won’t be met, she said.

“All of that will come,” she said. “These are great catalysts for there to be a very big wave of product.”

Goldman said he doesn't expect there to be a wave of hotels selling at distressed prices, though, noting most deals in recent years have not been distressed, and owners can find the right buyer to pay the right price.

Perez-Alvarado said distressed deals are likely to only occur when the hotels are functionally or physically obsolete and need to be converted to something else.

“We will not see that wave of distressed right now,” she said. “The fundamentals are too strong.”

International capital entering the U.S. hotel market was muted in 2022, one of the lowest years on record for that investment, Perez-Alvarado said.

It’s slowly coming back, and China in particular is starting again, mostly through sovereign wealth funds, she said.

Domestic family offices also have taken interest in the hotel sector, she said.

The issue, though, is there haven’t been a lot of trades, and people are waiting on those to help guide pricing, she said.

“You need to launch a trade to attract capital,” she said. “We haven’t seen those types of assets on the market, with the [Strategic Hotels & Resorts] of the world.”

With what’s available for investment currently in Europe, there’s the potential to make one of the world’s most attractive portfolios, Perez-Alvarado said, noting there are irreplaceable assets listed as available in Paris, Rome, London and Barcelona.

“Never at one time have we had so many of these assets be available for investments,” she said.

Aimbridge Hospitality’s U.S. operations entered the first quarter of 2023 up five or six percentage points in revenue over STR’s most recent forecast at the time, Aimbridge President and CEO Mike Deitemeyer said. Group business has been strong domestically, and he said the group bookings coming in have almost completely exceeded the blocks the company put in place.

STR is CoStar’s hospitality analytics firm.

While group demand is strengthening and leisure remains strong, business travel continues to be slower than anticipated, Deitemeyer said. It has increased, and the company is optimistic about the numbers in the second quarter. Even with layoffs by major corporations, customers are telling Aimbridge they’re not being pressured to cut travel because there’s pent-up demand for it while the number of trips they’re going on is well below historical levels.

The numbers are strong in Europe as well, he said. The main difference there is the high cost of utilities. In the United Kingdom, utilities cost four times what they did before Russia invaded Ukraine, so there’s pressure on the profit-and-loss assessments. Overall, however, Aimbridge executives are feeling good about performance in the continent.

As for the sustainability of leisure travel, Deitemeyer said leisure demand will perpetually be above 2019 levels because of how consumers view experiential travel and their ability to work remotely.

“I believe that’s going to be stronger than anticipated,” he said.

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