LOS ANGELES — A majority of Lodging Industry Investment Council members said they expect full-year lodging real estate transactions in 2023 to exceed the volume in 2022.
In a survey conducted at a private roundtable of members, 67% said they believe transactions will be up, while "27% believe the count will be roughly the same and only 6% predict down," according to Michael Cahill, CEO and founder of national hotel and casino advisory firm Hospitality Real Estate Counselors.
However, it won't be all sunny skies for every deal, said Jim Butler, founding partner of Los Angeles-based law firm Jeffer Mangels Butler & Mitchell, and founder and chairman of the firm's Global Hospitality Group.
The 2023 transaction environment is "going to be like in the Midwest on those summer days, when you could be standing on the street and it'd be sunshine here and you'd see the line of rain moving across, and it was rainy and sunny at the same time," he said ahead of the 2023 Americas Lodging Investment Summit. "We will have more transactions [but] there are a lot of things compressing value."
Last year, JMBM Global Hospitality Group represented Fertitta Entertainment, owned by Tilman Fertitta, on the bidding, acquisition and closing of the purchase of the Montage Laguna Beach Resort Hotel from China-based Dajia Insurance Group for an undisclosed amount. CoStar data, however, shows the resort sold for $661 million or roughly $2.5 million per room. The hotel was part of the former Strategic Hotels and Resorts portfolio.
"We've still got a big receivership of a huge hotel on the East Coast that is probably going to get sold this year, maybe not at peak values," Butler said. "There will be ... final sales and resolutions on some of the stuff that hasn't been cleaned up [from] people who aren't holding on any longer, and all that capital that's been waiting forever for hotels is going to start to come in."
Julienne Smith, chief development officer for the Americas at IHG Hotels & Resorts, predicts transaction volume will be up in 2023 due to the amount of hotel portfolios on the market, but the dollar amount in transactions compared to 2022 could be neutral as "portfolios tend to be the lower-ended brands."
Romy Bhojwani, director of hospitality market analytics, Northeast and Midwest, at CoStar Group, predicts the total hotel transaction volume in 2023 will surpass the $48.6 billion in total transactions closed in 2022 by as much as $7 billion.
Where is the Distress?
Steve Kisielica, principal at Lodging Capital Partners, said hotels at distressed pricing have not significantly hit the market. At the lower end of the market, debt service is staying relatively tame and fundamentals are strong. Then, at the higher end of the market, "you've got deep-pocketed investors who can ride through the cycle and sell to folks who [are] going to buy all-cash."
"We think the distress on the capital market side is going to force sellers [to dispose hotels]; cap rates are going to move up — our forecast is roughly 100 basis points," Bhojwani said.
Citing a report by Fitch Ratings, Bhojwani said there is $26.5 billion of commercial mortgage-backed securities loan debt in the commercial real estate sector coming due in 2023.
"They're forecasting, based off of the stress test that they run for every single CMBS loan, that two-thirds of that $26.5 billion will get refinanced," he said.
Of that $26.5 billion, $15 billion is hospitality-related, he said, meaning about a third of hospitality CMBS coming due in 2023 are likely going to be stressed or distressed.
"We're starting to see some signs of that. If you look at some of the urban market transactions that closed from [second quarter to fourth quarter 2022], they all ranged, in terms of discounts to prior trade, anywhere from 30% to 60% depending on the market," Bhojwani said.
Some of the distress is also related to the cost of debt service in certain urban markets. There's about 25% of the top 25 U.S. markets that are still not recovered to pre-pandemic levels. Those markets include Portland, Oregon; San Francisco; and Minneapolis.
Doug Dreher, president and CEO of hotel management and investment company The Hotel Group, said distress is most visible in upscale, full-service hotels that are approaching the end of their brand life and require property improvement plans.
"With COVID, despite [Paycheck Protection Program loans], the balance sheets are rattled in some cases for those assets," he said.
PM Hotel Group President and CEO Joseph Bojanowski said rate cap maturity is also playing a part in distress. If an owner has a maturing rate cap coming in 2023, it might be time to sell.
"While it's not a distressed asset, the delta between current and what your cap is [contributes] to that, too," he added.
David Duncan, president and CEO of hotel management and development company First Hospitality Group, posed a question to the roundtable: "On a forward basis, what's the perception of cost of debt impact on cap rates four or five years out?"
"It seems to me like the new definition of distress is somebody who really doesn't want to sell the asset but they sell it at 92 cents on the dollar anyways, as opposed to you used to get it 60 cents on the dollar," he said.
"And because of the increasing sophistication in the capital markets and massive aggregation of people wanting to buy into hotels for a bunch of reasons, including the lack of desirability for multifamily, retail and others ... it just seems like there's so much capital willing to fill the void a little bit, that the ultimate purchase price doesn't feel that discounted in a lot of transactions that we've seen."