(Corrected on Dec. 28 to state Pebblebrook Hotel Trust sold the Roger New York hotel in New York.)

While U.S. hotel industry performance has been slowly but steadily recovering from the COVID-19 pandemic, the deals made in 2021 show the recovery of hotel transactions is on a much faster track.

Throughout the year, instead of distressed pricing taking the spotlight, high valuations and prices per key typified hotel transactions. Buyers sought out leisure and resort properties, and even some full-service hotels in challenged urban markets attracted high spenders this year.

LW Hospitality Advisors' survey of major hotel sales in the third quarter tracked $14.4 billion in hotel sales. The second quarter survey of major sales found 60 single-asset sales totaling approximately $4.66 billion, and the first quarter survey reported 31 single-asset sales totaling $8.1 billion.

The surveys did exclude the major resort casino deals made during the first and third quarters as the dollar volume of those deals skewed the deal prices higher. Excluding the Venetian Resort Las Vegas and the Sands Expo and Convention Center, major hotel transactions in the first quarter amounted to about $1.85 billion. Similarly, excluding the Cosmopolitan Las Vegas deal as well as the Aria Resort & Casino and Vdara Hotel & Spa in Las Vegas, major hotel sales in the third quarter amounted to 88 trades totaling $4.8 billion.

Each quarter’s survey in 2021 showed a considerable year-over-year increase in the number of deals and their valuations. The third quarter survey from 2020 reported 12 single asset sales totaling $829 million, much lower than this year’s third quarter, even excluding the resort casino deals. Its third quarter survey of major sales from 2019 tracked 40 transactions totaling about $3.725 million.

By about halfway through the fourth quarter, Daniel Lesser, president and CEO of LW Hospitality Advisors, said he already had tracked 58 hotel trades totaling $4.5 billion.

The desirability of hotels and the yields they produce have turned hotels into an institutional food group, he said. Twenty years ago, hotels were like a stepchild compared to other forms of commercial real estate such as office, retail and industrial, but not anymore.

“You have lots of sophisticated real estate investors who know and understand the sector and are focused on the sector,” he said.

Large portfolio deals included Condor Hospitality Trust's sale to Blackstone for $305 million, Extended Stay America's sale to Blackstone and Starwood Capital for $5.94 billion, CorePoint Lodging's sale to Highgate and Cerberus Capital Management for $1.5 billion, and Apple Leisure Group's sale to Hyatt Hotels Corp. for $2.7 billion.

Leisure-focused and resort properties have proved resilient during the worst time the industry has faced, and as a result, much of the available capital was deployed to this segment, Jeff Davis, senior managing director at JLL’s hotels and hospitality group, said.

“It really became the tale of two cities where urban properties that are heavily reliant on business transient business didn’t do as well and the drive-to leisure transient resort properties did really well,” he said.

“The magnitude of capital all chasing the same type of product has resulted in premium pricing for these resort-branded leisure products. Some pricing is probably ... higher than these properties would have gotten pre-COVID in some instances, and that's probably the more eye-opening aspect of what we see in the transaction world from a resort perspective.”

Some capital investors have been interested in the big-box hotels because group demand has been recovering faster than transient business, Davis said, but he added those properties might not be quick to hit the market.

“If there’s no catalyst driving the hotels to market, and it’s not a seller’s market for that particular hotel, you may have buyers, but you don’t have sellers,” Davis said. “You have to have both to make a transaction. That’s why the resorts are trading, because resort owners are capitalizing a unique moment in time where their properties have outperformed and they’re taking their chips off the table.”

Everyone was gearing up for a rash of foreclosures and bankruptcies caused by the pandemic, raising capital to invest in distressed hotels, Lesser said. Though there was some distress, it wasn’t as much as expected, and all that competition and pent-up capital cut into distressed pricing.

That has resulted in record pricing, both in terms of the full cost of the hotels as well as the price per key, he said. Hyatt Hotels Corp. bought the Alina Ventana Big Sur only to sell it three months later with a long-term management agreement in place for $2.5 million per room, a record in the U.S. The Four Seasons Resort & Residences Napa Valley sold for about $2.1 million per key, as did the Montage Healdsburg.

In the U.S., there have been about seven deals priced at more than $2 million per key, and three of those were in 2021, Lesser said. The number of deals for $1 million-plus per room amount to about 38, and six of those were last year.

“On a ratio basis, it's enormous,” he said.

While prices fell off a cliff right after the pandemic began, generally prices are back to pre-pandemic levels if not higher, Lesser said. However, the fundamental operating metrics of the U.S. hotel industry have not recovered. What’s driving pricing, then, is what he calls “capital velocity.”

“It’s a bit of a fragile foundation that what’s driving pricing is the enormous amount of capital that’s competing for opportunities as opposed to fundamental economics,” he said.

The biggest question out there related to valuations is how robust the markets will be in the recovery and how sustainable the cash flow will be, Davis said.

“If you're buying off a peak [net operating income], are those peak NOIs at the resort leisure market ... sustainable going forward?” he said.

Davis said he expects cash flow will be sustainable as demand stays consistent for the next two to three years.

Through 2021, hotel real estate investment trust Pebblebrook Hotel Trust sold three of its hotels and bought another five, diversifying its portfolio by reducing its exposure to urban markets and picking up properties in more leisure-driven markets.

One of the reasons the REIT sold the Roger New York was because New York will be a challenged market for a long time, said Raymond Martz, executive vice president and chief financial officer at Pebblebrook. New York relies heavily on international inbound travel, and that’s going to stay challenged for a while, especially as new COVID-19 variants affect international arrivals, he said.

Pebblebrook also sold two hotels in San Francisco, the Sir Francis Drake Hotel and the Villa Florence Hotel, because while the market has many positive factors, the demand drivers are going to be slow to return.

At the same time, the company wasn’t trying to get out of those markets so much as capitalize on the demand for hotels and monetize their value, Martz said.

“I wouldn't say the market is as deep or wide in the urban areas as they are in the resort market — that's clearly not the case,” he said. “It’s certainly easier to sell in a resort market than it is an urban market, but there's not a shortage of buyers out there because of all the capital that's available.”

As for the properties it bought this year, Pebblebrook was opportunistic in its approach, finding assets that have an upside potential through redevelopment, changing operators or being repositioning in their markets, Martz said.

Many of the resort deals made in the past year were incredibly competitive, with some coming in at more than $1 million per key, he said. Pebblebrook tried to stay away from the more competitive bidding processes with its resort deals.

When there was some competition, the company’s existing relationships gave it some advantage, he said. For the Margaritaville Hollywood property it acquired for $270 million, Pebblebrook had a working relationship with the Margaritaville brand already as well as the property’s operator, Davidson Hotels & Resorts.

“We had unique positioning in there,” Martz said. “When you have one of those things where if there’s a tie, with all of these factors, we probably get the advantage.”

Next year will be a better year for selling urban hotels, Martz said.

“If you’re selling at a weakness, it’s almost like you’re selling because you need to,” he said.

Pebblebrook will remain opportunistic without any acquisition goals or quotas, he said.

“If we think there’s an opportunity to invest capital, we will,” he said. “We could buy no hotels in ’22. We could buy half a dozen. It really depends on the opportunities out there and the pricing.”

The hotel industry is in an inflationary environment, so there will be more appetite for hard assets like hotels because they can reset their rates every day, Davis said. The industry is starting a new cycle, not ending the old one, and that gives it the opportunity to grow rates, and that is followed by growth in valuations.

Some markets will recover faster than others, but Davis isn't betting against some the major markets that may be struggling currently, such as San Francisco, Chicago and New York.

“Given the opportunity to get into those markets today, I’d take that bet,” he said.

The majority of the trades have been in California and Florida, Lesser said, adding that “it’s just insane what’s going on in Florida.”

Smart, sophisticated investors won’t necessarily follow the herd mentality, he said. There will still be a lot of deals made in California and Florida, but some investors will look elsewhere for deals. New York has been slow, but long term, there’s tremendous opportunity there at the right price.

“When I say long term, I mean investors who need to be able to hold on for 10 years at minimum,” in a worst-case scenario, Davis said.

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