After a dour 2020, the pace of deals in the U.S. hotel industry is expected to pick up this year, even if it doesn’t quite reach the record levels set in 2019.

Transactions “fell off the cliff” after March 15, 2020, when the COVID-19 pandemic hit, Daniel Lesser, president of LW Hospitality Advisors, said during a recent Hotel Optimization online panel titled “Where the Opportunities Are.”

The second quarter of 2020 yielded only six single-asset trades at $10 million or more, compared to 35 single-asset trades in the same quarter of 2019, Lesser said. That’s an 83% decrease year over year.

There were 12 trades in the third quarter of 2020, compared to 40 the prior year, and 32 single-asset deals in the fourth quarter, compared to 54 in 2019.

“Everything’s relative in life,” he said, noting total transaction volume was down 80% year over year in the third quarter and down 75% in the fourth quarter.

“Clearly the activity is picking up,” he said.

For full-year 2020, deals were down 52% from 2019 — with 79 single-asset trades compared to 164. Total transaction volume was $5.3 billion in 2020 compared to $17.7 billion in 2019, a decline of 70%, and the average sale price per key was $273,000 in 2020 compared to $364,000 in 2019, a 25% decline.

Eric Guerrero, managing director and head of HVS’ brokerage and advisory division, said almost half of hotel transactions in 2020 were in the economy and midscale segment. He anticipates that trend will continue, especially with Small Business Administration debt relief available for deals valued below $10 million.

“Another interesting note is that a lot of non-hotel buyers are coming into the market,” he said.

Guerrero estimates that 8% of transactions last year were assets that were either going to be repositioned or turned into an alternative use — for example, repurposed by the government for at-risk housing and affordable housing. Some multifamily investors have also bought hotels to convert them into independent-living properties or apartments.

“I think you’ll see that continue,” he said, adding that “the spread between the buyers and sellers [will] slowly start to compress, and we’ll see way more deals happening this year than last.”

Lesser said in California alone, 10 transactions in the fourth quarter of 2020 were valued at $10 million or more. Seven were for conversions to homeless housing.

“A lot of these traded at some very healthy numbers,” he said. “There was an Extended Stay America in suburban San Francisco … that traded close to $450,000 a room for conversion to a homeless shelter.”

Because of these conversions, in addition to hotels permanently closing, industry supply will decline, he said.

Alan Tantleff, senior managing director at FTI Consulting, said his company looks at the level of distress in the industry, and the best gauge of that is the commercial mortgage-backed securities market.

“Virtually 20% of all CMBS hotel loans are in default, and that’s just remarkable. That compares to 1.5% this time last year,” he said. “The level of distress is phenomenal in the hotel industry. It’s actually come down a little bit since April … as people have worked out forbearance agreements, but there’s a forbearance cliff.”

Many of those six-month, one-year forbearance agreements are expiring, and several parties are looking to capitalize on the distress, Tantleff said.

“That’s what’s keeping pricing up; it’s still pretty competitive out there for better-quality assets,” he said.

Duncan Miller, partner at Morris, Manning & Martin, said his company’s clients have raised significant capital geared toward distressed opportunities.

“The question always was, when was that going to come to market, and … we really saw an uptick in the fourth quarter [of 2020],” he said.

At the start of the pandemic, deals were generally discounted 30% to 40% compared to 2019 levels, Guerrero said.

“I’ve worked on transactions where we’ve had as low as a 3% discount. On the other side, as high as a 40% [discount]. It’s hard to say where it’s going to end up but, in my opinion, I’m thinking roughly 25% compared to pre-COVID values is where it will ultimately shake out,” he said.

He said HVS has been actively talking to lenders, and financing is slowly starting to come back, which will drive the transaction market.

Lesser said real estate investment trust Xenia Hotels & Resorts sold the 492-room Renaissance Austin Hotel in Austin, Texas, for $70 million — a 30% discount on the $100 million price tag it was listed for in January 2020.

Similarly, Sunstone Hotel Investors sold the Renaissance in downtown Baltimore for $80 million.

“That was originally supposed to go down at $100 million. That’s a 20% decline,” he said. “That’s the market talking.”

In New York City, Ashford Hospitality Trust sold an Embassy Suites in Manhattan 18 months after acquiring it, at a price 40% lower than what the company paid for it, he said.

The Waldorf Astoria in Chicago recently traded for $54 million, or about $250,000 per key, which “just from a pure real estate perspective and the quality of the facility … seems like an absolute steal,” Lesser said.

“The last time the hotel traded, it was for more than double $54 million,” he added.

Conversely, the Residence Inn by Marriott Arlington Pentagon City in Arlington, Virginia, sold to Amazon by Blackstone for $148 million in September 2020. One year prior, Blackstone acquired that property from Host Hotels & Resorts for $99 million.

“That’s a $50 million spread or a 50% increase during COVID,” he said.

Lesser said hotels are a unique asset class because it’s daily leasing of guestrooms, and pricing of those units “changes by the nanosecond.”

“That is a beautiful thing in an upmarket. In a downmarket, it kills you, just like we’ve been experiencing,” he said.

The lodging sector is vulnerable to “black swan” events — unpredictable, large-scale crises — and there’s always risk, but the industry will get past this current crisis, Lesser said.

“I do believe that all types of travel [will] come back with a vengeance and very quickly — whether it be corporate business, conventions, leisure,” he said. “Every time there’s a calamity it seems we come back bigger and better at some point. How long that takes? I don’t know.”

In previous downturns, from a brokerage perspective, “you had to sacrifice price for certainty of execution as far as getting deals done,” Guerrero said.

He anticipates this time around will be much different, and it’s possible to have both certainty of execution and price, which will fuel the marketing moving forward.