The COVID-19 pandemic has created an uneven hotel deals market in the U.S., one in which buyers are paying above asking price for certain properties while other hotels go up on the auction block.

“I would say in my career, I've never had a market that is more divergent and disparate, in terms of what is out there,” said Mike Cahill, CEO and founder of Hospitality Real Estate Counselors.

Early on in the pandemic, many investors expected a wave of distressed assets going up for sale at significant discounts as struggling owners viewed selling off hotels as the only way to survive ongoing costs without any incoming revenue. Thanks to several rounds of federal assistance, flexible lending arrangements and stronger-than-expected leisure demand, the wave never arrived.

That has resulted in greater competition for desirable hotels that go on the market, which means buyers have had to sweeten their offers.

There are hotels up for sale where buyers are getting aggressive in their offers with earnest money deposits and competitive bidding through second or third calls for offers, Cahill said. At the same time, the auction companies are relatively busy.

The number of distressed deals won’t amount to what people anticipated, but there will be some being sold through auctions or through other deep discounts on pricing, he said. There is another market out there of owners who are happy if they can get 2019 pricing.

Cahill said what he finds interesting is the number of hotel deals coming in at or above 2019 prices while the Delta variant is still spreading.

“There’s something I think you probably wouldn’t have anticipated me telling you six months ago,” he said.

Many owners who have held on to their hotels are now taking another look at selling given recent valuations, he added.

Deal pricing is dependent on the markets, said Johannah Rodriguez, managing director of acquisitions at Driftwood Capital. There is discounting for some of the large hotels for corporate, group and convention guests in urban locations where demand hasn’t recovered yet. In the more leisure-driven markets, pricing can go above and beyond 2019 levels.

The competition for deals is surprising given how much the pandemic affected the transaction market only a year ago, she said. It was difficult to determine pricing and applicable discounts for assets in 2020, creating a large bid-ask spread for the limited number of hotels that were on the market.

By the fourth quarter of last year, there was an increase in transactions following news of the COVID-19 vaccines and the belief the end of the pandemic was in sight, she said. Though transaction numbers were still muted compared to 2019, the bid-ask spread started to decrease. The transaction market has picked up in each subsequent quarter.

HREC has closed more than 50 deals already this year, and they’re all different, Cahill said. They’ve ranged from auction sales where there were only one or two bidders to the Bourbon Orleans Hotel in New Orleans that sold for more than $80 million.

Aggressive buyers are adjusting their terms for what they consider highly desirable assets, he said. They are not all trophy assets, but they are hotels in markets where people want to be or assets or areas buyers have long targeted. For them, it’s more important to get those assets than to get them at a discounted price.

Hotel brokers typically deal with exclusive listings and “silver bullet” listings, Cahill said. In the former, the client gives the broker the exclusive deal to sell a hotel for a certain amount of time before they work with other brokers. In the silver bullet listing, the brokers are matching buyers and sellers for off-market deals.

In the history of his company, HREC has never seen this high a ratio of silver bullet transactions, coming in at about one-third of its closings currently, he said. The thing about silver bullet deals is that to get the deal, the buyer has to convince the seller the terms of the deal are good enough that the seller doesn’t need to put the hotel on the open market for a better offer.

These silver bullet deals aren’t just about pricing — though the prices are solid — it’s also about certainty, Cahill said. Sometimes the seller will give up a little bit on the pricing if they don’t have to worry about the buyer bailing out on the deal, which is where these non-refundable deposits and all-cash offers can come in.

“I would say it's as strong now for the desirable assets as it has been in other peak markets,” he said.

Executives at Peachtree Hotel Group want to buy hotels, but it’s a challenge to find opportunities given the competition out there, Managing Principal and CEO Greg Friedman said.

“People are paying the asking price or even above,” he said. “In a lot of cases, I think pricing is well ahead of where the recovery stands at the moment.”

Within the last six months, Peachtree has acquired two hotels and is in the process of buying another two, Friedman said. Peachtree is also working on additional deals he hopes the company can close on over the next several months, assuming both sides can agree on pricing.

To stay competitive in hotel deals, Peachtree has had to shorten its due diligence time frames and become more aggressive on its closing time frames, Friedman said. In some cases, it’s looked at a more restructured-type deal where the existing owners could stay in for some upside down the road.

There are more off-market transactions taking place now than what Rodriguez said she has seen in the past. There’s also a number of selectively marketed deals shown to a handful of potential buyers.

“So, transactions are definitely getting done, but it's really all about relationships,” she said. “We've had to be very proactive about seeking out potential dispositions as opposed to in the past when a lot of times, you could wait for some of these widely marketed deals to come to you.”

Having good relationships with top hotel brands and with lenders has allowed Driftwood to receive feedback quickly from sellers when it reaches out about potential deals, she said.

When submitting bids, Driftwood has had to get more creative, Rodriguez said. One of those changes is moving quickly and doing a lot of the due diligence upfront and getting the internal approvals needed in advance. The accelerated due diligence time frames has given sellers confidence in closure. However, the faster pace does not mean loosening underwriting parameters to get the deal done.

Driftwood is doing a deeper dive in markets through its due diligence to see when the demand sources are expected to recover, she said. For example, a corporate or group box hotel in an urban market is going to need a discount compared to a hotel in a leisure destination with cash flow in place.

Because of the competition for deals, Peachtree has found more success in buying hotel debt, Friedman said. It’s an extension of what the company has done before as it’s an investment platform that invests both on the equity side and on the debt side of premium-branded hotels. Looking at its overall acquisition activity since June 2020, the company has purchased more than $1 billion of stressed and distressed assets.

“We’ve been very successful in buying first mortgage loans and federal loans from different financial institutions that are looking to de-lever out of the hospitality industry,” he said.

Peachtree sponsors different investment vehicles that invest on the equity side or debt side of hotel properties, he said. It also owns several companies that service the different investment vehicles its sponsors.

Pursuing the debt isn’t as much a change in strategy as it is taking advantage of the opportunity to invest capital to receive better returns, he said. There’s less competition in buying debt.