Hotel operating statistics continued to reflect the industry's strong recovery in 2022 and spurred ongoing investor interest in hotel properties across all classes.
After adjusting for the $17.5 billion Vici sale-leaseback deal with MGM properties in the second quarter of 2022, total annual hotel sales in 2022 were only $2.5 billion below the record-breaking total in 2021. Throughout the year, the interest rate environment became more and more uncertain as the Federal Reserve raised rates. Despite the higher cost of capital, hotel buyers and sellers continued to do deals and quarterly transaction totals increased between the second and fourth quarters. Although the first-quarter sales volume of more than $15 billion has not been reached since, over the past three quarters, hotel sales volume increased from around $8.8 billion in the second quarter to $11.2 billion in the third and then increased again to $12.8 billion in the fourth quarter.
The single largest deal in the fourth quarter was the sale-leaseback transaction of the Encore Boston Harbor by Wynn Resorts to Realty Income Corp. for $1.7 billion at a reported 5.9% capitalization rate. Wynn will pay $100 million in annual rent for 30 years and holds a 30-year renewal option. Because the deal includes the large casino, the price was around $2.5 million per key, much higher than for other, similarly sized, non-casino hotel properties.
Only 34, or around 3%, of the 2022 transactions involved luxury hotels. But those trades made headlines because of the outsize prices per key they achieved. The average price per key for all luxury hotel sales was $811,000 per key, but many resorts, such as the Montage Laguna Beach, the Four Seasons Resort Jackson, The Fairmont Sonoma Mission Inn and the Ritz Carlton Key Biscayne, sold for over $1 million per key, a price that was unheard of in the mid-2010s. The Montage even reached almost $2.5 million per key. Since luxury demand and room rates seem to have reset at a much higher level than before 2019, higher prices on the very high end are likely in the future.
Economy properties accounted for 38% of the annual sales and mid-scale properties accounted for 13%, evidence that limited-service properties on the lower end of the room rate range are still in high demand for individual investors, given their price of sub-$100,000 per key.
Looking ahead into 2023, expect continued strong demand for high-end properties, which investors feel are, if not recession-proof, then at least recession-resistant. The largest number of properties will continue to be traded at the lower of the price spectrum, where limited-service hotels can be purchased at attractive cap rates by non-institutional investors. As interest rates plateau, and perhaps even decline in coming quarters, more attractive financing will likely be a further catalyst for heightened transaction activity this year.