Hotels are evolving into a preferred asset class for investors based on transaction volume trends across other commercial real estate asset classes. Specifically, hotel sales volume growth has doubled office sales growth in recent months, compared to the long-term historical average.
Annual hotel transaction volume as a percentage of office transaction volume has averaged 26% from 2006 through 2019. In 2022, hotel transaction volume spring-boarded to 53% of office transaction volume, the highest level going back 17 years. Year to date through April 2023, hotel transaction volume at $12.2 billion is 45% of office transaction volume, materially higher than the long-term average of 26%.
Annual transaction volume for hotels in 2022 was $74.9 billion — a record year for hotel transactions. The previous record of annual hotel transaction volume was in 2021 at $57.1 billion. Office transaction volume in 2022 was $141.9 billion, only 76% of the record high $186.7 billion in 2007.
Offices as an asset class are facing some of the most severe headwinds across all commercial real estate, due to a potent combination of low office utilization driven by remote and hybrid work trends, record high economic vacancy rates, record high availability of sublease space and the largest interest rate hike in recent years. Since 2019, office vacancy rates have increased 350 basis points to 13% and the amount of space available for sublease has doubled, as have borrowing costs on floating-rate debt.
Office loan delinquency rates are rising and values are down materially; however, transaction volume is relatively low given the uncertainty in the sector and related challenges in underwriting an office deal at this time.
Hotels, on the other hand, are having a moment. April revenue per available room, or RevPAR, for the U.S. lodging industry was up 12.2% compared to 2019, driven by a 17.8% increase in average daily rate, or ADR. Demand continues to be strong, driven by a healthy mix of high-rated leisure transient and group business, and the corporate transient segment continues to recover.
Hotels have proven their resiliency as an asset class via the strong recovery compared to previous down cycles. It took the industry 26 months to get back to pre-pandemic levels of revenue per available room, which has greatly accelerated recovery compared to the previous two down cycles in 2001 and 2008. Certain sectors of the industry, such as luxury resorts and select-service hotels, are achieving record profitability.
Increasingly higher levels of sophistication in revenue management have enabled hotel operators to price rooms to match or outpace record-high inflation while optimizing RevPAR. The ability to price rooms dynamically on a daily basis adds to the attractiveness of hotels as an investment asset class.
Given the strong current cash flow generated by hotels, expect this asset class to be highly sought after, as it provides the best hedge against inflation and delivers highly favorable yields despite current high interest rates.