Despite hotel transactions volume decreasing in 2023, many experienced brokers were still able to pair up with eager sellers and buyers looking for a deal. Hotel Business caught up with Dennis S. Hopper, managing principal, DSH Hotel Advisors; Ed James, managing principal, Mumford Company; and Earle B. Wason, president, Wason Associates Hospitality Brokerage Group, to get their views on the current state of transactions and what they are expecting in 2024.
—Adam Perkowsky
Has 2023 lived up to your expectations? Why or why not?
Hopper: 2023 has exceeded our expectations in terms of deal volume; transactions closed by our team; and our team’s pipeline of deals moving into 2024. We were expecting a 15%-25% drop in sales volume in 2023. However, we are on pace to match or slightly surpass last year’s earnings with an even stronger pipeline moving into 2024. I think this is largely due to our firm picking up substantial market share in the last three years—to the point where it is offsetting the drop in overall deal velocity in the marketplace. I do realize that other firms are seeing significant drops in deal volume and earnings when compared to 2022, which is representative of the overall market.
James: Perhaps somewhat unexpectedly, 2023 turned out to be a steady year with transaction activity as our firm continued to see a typical flow of transactions throughout the year. In the face of much higher interest rates, higher equity requirements and much more rigorous underwriting by lenders, strong property-level operating results and continued demand for acquisition of mid-market, limited-service hotels kept our volume steady in 2023.
Wason: Yes, it has been another very good year for my firm. Having sold the Anchorage by the Sea in Ogunquit, ME, in June for $100 million and the Tapestry Capital Plaza in Montpelier, VT. for more than $22 million certainly helped. We are finishing the year strong with four more transactions, but some of those could move into 2024. We did have slightly fewer transactions in 2023 versus 2021 and 2022 but higher commission revenue.
Ed James Mumford Company
What types of hotels are highly desirable from an acquisition standpoint right now?
Hopper: We think that limited-service, midscale hotels are the most desirable and will continue to be most desirable moving into 2024. The challenging labor market, rising cost of supplies/expenses, rising cost of capital and the drop in room revenue (in certain markets) leaves the limited-service, midscale segment best positioned to navigate these challenges as they require less employees and less supplies to operate (compared to full-service and/or upscale and higher hotels). From an acquisition standpoint, they are holding their value better than others. I think this is due to valuation metrics often having more consideration of the top-line room revenue and less weight on cap rate (compared to upscale and higher hotels, which are often trading based on cap rate/cash flow). The inflationary market has increased revenue and therefore price/value for this hotel segment, while the increase in cost for expenses hasn’t dramatically decreased valuation because of the weight that investors place on the top-line room revenue for this type of hotel asset.
James: As has been the case for several years now, legacy-branded, select-service and extended-stay hotels in the Sun Belt states and other high-growth markets are at the top of the list for hotel investors. Other popular acquisition targets are full-service or larger limited-service properties that can be converted into extended-stay hotels or other multifamily uses like apartments, condos or senior living facilities.
Wason: For the past three years, our firm has been in the perfect niche as we represent a significant number of resort properties. This has been the strongest market segment and continues to be. The independent, non-franchised resorts are getting a very serious look. Also, hotels that can be purchased under $100,000 a room and in need of renovation. As construction prices hit $200,000 a key and up, the remodeling costs will allow for an all-in purchase significantly below new-construction costs and can focus on a room rate that guarantees a hotel to compete very favorably in most markets.
Earle B. Wason Wason Associates Hospitality Brokerage Group
What are your predictions for 2024? Will transactions heat up?
Hopper: We are predicting that our team will surpass 2023 sales volume in 2024 by 30%-35%. We think that the overall market will see a slight uptick in transaction velocity compared to 2023 (barring any surprises in the market). I see Q1 being a bit of a slower start, but the market heating up in Q2 and Q3, at which point, if interest rates drop at any point in 2024, we could see that as a turning point for investor confidence to improve and capital to start rushing back into the market. Additionally, there are a substantial number of loans coming due—which will cause owners to either sell or refinance— and with interest rates at the current levels, many of those owners will elect to sell.
James: We anticipate 2024 to be another “transitional” year, much like 2023. The current economic shifting to the higher interest rate environment and the resulting resetting of basic valuation tenets or metrics (whichever you like) moving forward will tamp down the transactions market for the near term before we commence a new and hopefully long growth cycle. One factor that could potentially lessen the downside in this transition would be an increase in transaction volume resulting from CMBS default resolutions that must occur before these properties can be repositioned or repurposed. Lastly, 2024 is a presidential election year, and how that process plays out over the year could impact confidence in our future economic growth prospects.
Wason: Obviously, we would all like the crystal ball. However, at this time I do not believe that inventory of hotels for sale will see an increase until after the election. The current economy is an enigma as 60% of the population lives paycheck to paycheck. However, I do feel hotel revenues will be much like 2023 which did fall off from 2022. The trend in my market areas has seen a 5%-15% occupancy drop but ADRs are holding well during the primary business months. Clearly the interest rate increase has had big impact on hotel values, forcing many to sell their hotels. I have seen a very big generational shift in the past few years, and I believe this will continue. The motivation to sell and the small—if any—mortgage in place, as well as a small inventory of properties for sale is a very good combination.
