The COVID-19 pandemic wreaked havoc on the hospitality transaction market in early 2020. Having completed a banner year in 2019 that generated near-record metrics for number of hotels sold and total price per unit, 2020 was expected to be as strong or potentially stronger than the previous year, continuing the multiyear growth cycle already in place. Acquisition financing was readily available, buyers and sellers were plentiful, and hotels were pushing RevPAR higher every quarter.
As we entered 2020, we appeared to be on very solid ground indeed, but our attention quickly turned to the rapidly spreading “Novel Coronavirus” originating in China. Questions about transmissibility and whether it could or would spread outside of China were answered quickly as the pandemic began to take its toll on the world and, more specifically, our industry. By March of 2020, hotel buyers were looking for the exits, if any existed, on deals that were still in due diligence, financing commitments that were in any way still contingent were pulled, and the flow of transactions came to a grinding halt as our government provided guidance for our population to stop traveling and stay home for the foreseeable future. This was devastating news on many levels, but was particularly bad for the hospitality industry.
This crisis seemed quite similar to those that had rocked our industry over the years. In the early 1990s, the Resolution Trust Corporation (RTC) was formed to dispose of assets from failing savings and loans associations selling hotels for pennies on the dollar in some cases. We all remember where we were when the first plane struck the World Trade Center on 9/11. I recall a discussion in our Newport News, VA, headquarters shortly after the towers fell, wondering if anyone would ever fly on planes again for business or pleasure, and if there was even a future for our company or our business. The Great Recession of 2007-2009 was the most severe economic downturn since the Great Depression of the 1930s, bringing our industry a massive and very rapid downturn after a long growth cycle. In every one of these downturns, the hotel business and the resulting hotel transactions market recovered fully and fairly quickly. In short, our industry has shown remarkable resilience each time it has faced a downturn.
The difference with this most recent crisis is that the pandemic did not allow us to resume life and travel as we knew it after the initial shock of the downturn due to the evolution of variants and continued spread of the virus into and through 2021. While we did recover partially and began to buy and sell hotels again actively, full recovery and the eventual start of a new growth cycle are still ahead of us 24 months into this crisis.
So, where are we now, and what should we expect in terms of full recovery and growth prospects looking forward? The pace of hotel transactions is driven by the trend of property-level operating results and the availability of acquisition financing primarily. As we move into the spring of 2022, both of these markers are clearly on the positive side of the ledger and looking stronger in both the short and medium terms. While the business traveler and convention/meeting attendee have yet to return to the road in full strength, hotel occupancy and RevPAR levels are recovering quickly due to strength in the leisure/drive-to markets. It has been reported that December 2021 room demand matched the number of rooms sold in 2019 and that the ADR was the highest in history for the month of December. Perhaps a more telling indicator of the strength of this recovery is that unlike the recoveries after previous downturns, demand and room rate are both improving simultaneously.
On the transaction pace side, HVS reported in its fall 2021 brokers survey, the sentiment had improved dramatically from the previous year. In the fall of 2020, 89% of brokers surveyed said the market was “cool or cool and starting to turn.” In the fall of 2021, 75% said the market was “steady or hot.” Brokers reported cap rates for select-service assets down to 8.0 from 8.5 a year earlier, and room revenue multiples up from 3.5 to 3.6.
Our experience at Mumford Company from November 2021 through February 2022 has been a tremendous increase in activity, and all indications are that, barring unforeseen geopolitical disruptions, this will continue moving forward. Our current buyer demand exceeds our inventory levels but to a lesser degree as we move forward. We are now seeing an increase in the number of properties coming to market from individual sellers and special servicers as the operating results have improved. Properties that should have come to market in the last 24 months are finding their way there now, and while we are still unable to meet buyer demand, the transaction pace is improving quickly.
There are still some uncertain questions that can affect deal flow moving forward. Obviously, events in Eastern Europe, as well as inflationary concerns at home, dominate today’s headlines and can significantly impact how we move forward. Other questions, such as the future of laws relating to capital gains treatment and 1031 exchanges, etc., can and will have an effect. Still, all in all, the pieces are in place for a very active 2022 and a positive look forward at a new and hopefully multiyear growth cycle in the hotel transactions market. As we have seen repeatedly, the word that best describes our industry in economic terms is resilient, and that will be the case moving forward.
By Ed James, Mumford Company
Guest Author
