The ongoing recovery in hotel performance metrics continues to attract buyers and spur deals, albeit at a slower pace than last year. More than 1,700 properties changed hands for a total deal volume of under $11 billion in the third quarter, well below the quarterly sales average of approximately $15 billion in hotel sales recorded in each of the four quarters ending in the first quarter of this year.
While it is likely that the continued interest rate increases by the Federal Reserve and a looming recession have dampened investors' appetite for hotel properties, the industry recovery varies widely by property type and region. While larger institutional market participants may stay on the sidelines, regional owners, with the support of local or regional banks, will likely continue to be active in the market.
The strong recovery in Southern and Sun Belt markets has attracted investors to those states, with California, Florida, Georgia and Texas accounting for over a quarter of the sales. As migration patterns continue to evolve and white-collar workers have the option of working outside their main office location, hotels in areas that record the largest migration inflow continue to be attractive.
Around a third of third-quarter hotel sales involved economy-class properties. Prices per key followed the usual valuation pattern. While luxury hotel sellers on average realized prices of just over $400,000 per key, economy and mid-scale class properties were available for less than $100,000 per key.
Capitalization rates for hotel transactions continue to register on the upper end of any commercial real estate asset type, giving hotel assets an attractive entry point for first-time buyers or investor who bet on cap rate compression in the future.
CoStar's new industry forecast still calls for revenue per available room or RevPAR growth in 2023, despite the recession, which will likely affect the first two quarters of next year. It remains to be seen if the negative macroeconomic backdrop will result in some owners divesting some of their non-core assets, which could boost the transaction activity in the new year.