A few sparks are lighting the fire under hotel transactions in the U.S.
Chief among them are the volume of loans coming due that would be under critical stress if refinanced at today's high interest rates, according to a recent JLL report.
Add in the fact that sellers are worried about rising insurance and capital expenditure costs while investors are itching to deploy capital. The U.S. may just be in the perfect position for hotel sales to take off, said Zach Demuth, global head of hotels research for JLL Hotels & Hospitality, in a video interview held during the 2024 NYU International Hospitality Industry Investment Conference.
"We're at a unique inflection point where [revenue per available room] is generally still relatively high, but starting to normalize in many markets," Demuth said. "While many hotels might be having record-high revenue numbers, they also are struggling from a profit perspective."
Refinancing the high volume of commercial mortgage-backed securities coming due this year would cost owners a lot more at today's rates, he said.
"Loans are coming due, rates are 3.3 percentage points higher, if you were to refi, even at your current net operating income, it would be challenging to meet coverage ratios," he said.
All this, plus normalization of RevPAR growth and slimming profitability, "creates this perfect storm" that should catalyze transactions, Demuth said.
But Demuth was careful to point out that "we're not talking about widespread distress," but rather a scenario where "realities are starting to kick in."
"If you do have a loan maturing, if you either can't afford to refi or if it's going to put tremendous stress on the asset, you're likely better off going to market, maybe selling it at 80% of what you would otherwise want," he said. "At least you're able to pay back your loan."
To make the scenario a little sweeter, he said JLL sees more well-capitalized buyers coming to market, often interested in all-cash deals. Those are often private-equity investors with funds to deploy on a schedule, cross-border capital and high-net-worth individuals.
As for the types of hotels that are most likely to trade in these circumstances, Demuth said they'll likely be cities that have been heavily reliant on a singular segment, "particularly ones heavily reliant on group or business travel," since that's been slowest to bounce back.
That includes Sun Belt markets such as New Orleans and Houston, as well as West Coast markets such as San Francisco.
Demuth said that the bifurcation characterizing hotel industry performance so far this year also applies to hotel transaction scenarios as well.
The "wall of CMBS maturities" generally applies to institutional-quality hotel assets, both large, full-service high-end hotels and institutional-quality portfolios. Luxury hotels with in-place cash flow have been selling at million-plus-per-key rates. But hotels that fall under those — the big-box upper-upscale and upscale hotels most reliant on group or business-transient demand — are the ones most likely to come to market.
"We see more and more buyers coming to the table. Yes, these values are typically 20% to 30% below what they may have been two or three years ago when money was free," he said. "But it's not a bad thing. ... There is the belief that if enough buyers come to the table, that will inherently raise pricing."
For the full interview with JLL's Zach Demuth, watch the video above.