The U.S. hotel industry is seeing a splintering within its transaction environment this year.
On one side, there’s tremendous investor interest in smaller hotel deals, typically sub-$25 million deals that involve select-service hotels or, in some cases, compact full-service hotels. Zach Demuth, global head of hotels research at JLL's hotels and hospitality group, said these types of deals are relatively easy to finance as there’s more debt liquidity from regional banks or equity on its own.
On the other side, there’s increased investor interest in luxury and otherwise iconic assets, he said. JLL’s latest research found eight hotel deals valued at more than $200 million this year.
Those hotels include the Hyatt Regency Orlando for $1.07 billion; the Turtle Bay Resort for $725 million; the Arizona Biltmore for $705 million; the Ritz-Carlton Key Biscayne for $400 million; the Eau Palm Beach Resort & Spa for $277.9 million; the 1 Hotel Central Park New York for $265 million; and the Hyatt Regency San Antonio for $230 million.
JLL executives said they could not yet disclose the eighth large transaction.
JLL's research found the dollar volume of single-asset deals larger than $200 million year to date through August was a 59% increase compared to the same period last year. All together, these deals amount to about $4 billion, a 15% rise over 2019 levels.
Bigger deals
The demand for the bigger, higher-priced hotels and resorts come from this segment's overall performance, Demuth said.
“Luxury hotels continue to perform exceptionally well," he said. "There’s a lot of growth of high-net-worth wealth, and therefore there’s growth of demand for these assets.”
The higher-priced trades are obviously harder to take down in a sense of it’s a much larger equity check, typically requiring commercial-mortgage backed securities or other financing, he said. They are highly susceptible to what’s going on in the public markets, and interest rates have been high alongside greater uncertainty in geopolitical headwinds. As certainty has increased, though, these large hotel deals have materialized at a faster clip than many expected.
Each of those $200-million-plus deals were somewhat unique, Demuth said. The commonality across these highlighted deals is that these are irreplaceable properties in high-growth markets. The Turtle Bay Resort bought by Host Hotels & Resorts for $725 million that is now a Ritz-Carlton hotel would be impossible to rebuild in that location.
“So, the opportunity to acquire even at a relatively high value — again, you’re really acquiring an irreplaceable asset,” he said.
The same could be said about the 705-key Arizona Biltmore, LXR Hotels & Resorts, deal for $705 million, or the 1,614-key Hyatt Regency Orlando deal for $1.07 billion, he said.
“To be able to build a 1,600-room hotel in today’s environment: possible, but highly unlikely,” he said, adding the deal includes adjacent land for a neighboring hotel.
If these hotels are performing so well, the obvious question is why sell. Each of these owners has their own reasons, Demuth said. Hyatt Hotels Corp. wants to maintain an asset-light operating model, pledging to sell $2 billion in properties by the end of the year, something it has achieved now. With Blackstone selling the Turtle Bay and Arizona Biltmore properties, it could have held them to potentially make more returns, but its business plan is to be a value-add owner before selling.
On the buyer said, Host in particular has shown a real appetite to buy hotels in high-growth markets at relatively elevated prices with the understanding it can add more value through brand conversions or internal policies, Demuth said.
Some buyers have been on the sidelines but are now becoming more active, he said. There’s so much capital on the private equity side that now is an opportune time to make a deal. Some buyers are also experiencing some fear of missing out.
“Once one of those big buyers come off the sidelines, it’s like the others feel like they’re missing out if they don’t,” he said. “I think the more capital that comes off the sideline, the more competition there’ll be to some capacity. Some of these buyers feel like first to market opportunity, first to market entry.”
More hotels will come to market over the coming months, much of which will be due to the underlying capital markets, Demuth said. There are only a handful of buyers that can take down assets in excess of $200 million, and even fewer that can take more than $500 million.
Less desired deals
The transaction segment that has struggled is the one in the middle, Demuth said. These are typically upper-upscale, full-service hotels, particularly those in the secondary and tertiary markets. There hasn’t been much liquidity in this segment for the past 18 to 24 months, much of it due to performance levels.
“These hotels have generally lagged the most, either because of lack of return of corporate travel or group travel and then some softening in leisure,” he said.
That said, Demuth expects more of these hotels will sell as there’s a lot of value in these opportunities. However, these deals will require committed buyers.
“You have to understand the opportunity is going to come from reinvestment,” he said. “A lot of these hotels have been somewhat neglected from a [capital expenditure] perspective, from a [property improvement plan] perspective.”
These deals will require a seller who understands the market and a buyer who understands the investment necessary, he said.