Transactions expected to pick up for hotel owners

After a slow start to 2024, owners and developers have done their best to keep up transaction activity while managing challenges. Despite headwinds, acquisition teams continue to pursue opportunities and look to a very hopeful 2025. Hotel Business spoke with Greg Friedman, managing principal/CEO, Peachtree Group; Brian Patrick Martin, president/CEO, BPM & Company Inc.; Ben Pierson, managing director, Rockbridge; Brad Rahinsky, president/CEO, Hotel Equities; and Len Wolman, chairman, Waterford Hotel Group, for their take on what’s to come.
—Abby Elyssa

Has 2024 met your expectations so far?
Friedman: At the start of 2024, we anticipated that equity investments would be slow in the first half and would pick up later in the year, which has indeed been the case. We have successfully closed on three hotel acquisitions, two will close by the end of July and two additional deals are under agreement. The market continues to experience a significant bid-ask spread, making deal-making highly situational. Despite these challenges, our acquisition team has maintained a comprehensive strategy, actively pursuing all opportunities, including off-market deals and working with brokers. Our proactive engagement, leveraging personal relationships and diligent search efforts, has kept us relatively active.

Martin: Well, I can honestly say no. Coming into this year, looking at the inverted yield curve and prospects of slowing inflation, I felt there was a good chance that we would have been past peak interest rates, and the start of a gradual easing cycle would have been underway. With the caution that we are a mosaic of micro-markets that make up our work of art and not a broad-brush macro-based canvass, I thought that going into the year a combination of moderating inflation and interest rates would have spurred some corporate demand, helped with borrowing costs and perhaps moderated wage growth.

While we have seen a steady (if slow) return of CNR/LNR demand, borrowing costs (and liquidity) remain constrained and wage growth remains inflated. Regulatory burdens in the latter (at the state and local level) have been impactful, but the elephant in the room is the coming adjustment to exempt employee wages.

Pierson: 2023 was one of the hardest years in commercial real estate, and while hospitality has fared well, the rise in interest rates, the decrease in asset liquidity and the challenged banking sector all contributed to making it a difficult year. We have been through many cycles in our 25-year history and these periods usually lead to opportunity. We have been active in 2024 and expect that to continue in 2025 and beyond.

Rahinsky: 2024 has exceeded our expectations. We’ve expanded our portfolio, most notably into the Caribbean & Latin America (CALA) region, strengthened our support team; infrastructure and business intelligence; and further improved upon our operations platform resulting in optimal performance and returns for our stakeholders.

Wolman: 2024 has been a year of mixed results. While there have been periods of strong performance, overall returns have fallen short of expectations. The post-pandemic surge in leisure travel has cooled, and the competitive landscape, particularly in Florida, has intensified. These factors, combined with rising operating costs, have put pressure on property valuations and overall investment returns. It is clear that the industry is undergoing a period of adjustment, and we are monitoring market trends to identify opportunities for optimization and growth.

Will you purchase new properties? Are you buying existing properties or are you building new ones? Why?
Friedman: We anticipate an increase in transaction pace in the latter half of the year, with greater activity expected in 2025. Our acquisition team has been very active, evaluating numerous deals, but the market continues to experience a significant bid-ask spread, making deal-making highly situational. Many current transactions involve groups facing debt maturities, property improvement plans (PIPs) or other balance sheet issues. While hotel performance remains strong industry-wide, stress often arises from balance sheet pressures, forcing some owners to transact. We are building hotels because the post-COVID era presents a unique opportunity characterized by strong fundamentals and limited supply, making the hotel sector an attractive investment option. Global travel is projected to outpace inflation, reaching $15 trillion over the next decade. This significant growth in travel demand, coupled with limited new hotel supply, creates a favorable scenario for existing hotel inventory to capitalize on the surging interest. Furthermore, the robust activity in renovation and conversion, driven by brands’ demand for refreshes, further highlights the sector’s potential.

Martin: Yes, we are looking at existing assets to buy, but our acquisition pace is not going to be anything near what it was between 2020 and 2022. There is still a reasonable disconnect between buyers and sellers and driving this disconnect are not supply and demand fundamentals but future costs. At the end of the day, most hotel transactions are driven by expectations on future investment needs and cash flow. We know that we have headwinds on the labor side and higher short term debt costs to contend with. We also know that the cost to execute even small renovation projects has skyrocketed (note to all—there is no such thing as transitory inflation when money supply has seen a massive increase) and not likely to come down. A lower interest rate environment will help smooth some of these issues, and firmer wages certainty would also help quite a bit. So buying today is difficult and getting a reasonable price as a seller is hard. Are we willing to buy? Yes. Will we be able to? That’s unknown.

Pierson: Yes, we have been acquiring and developing hotels successfully for more than 25 years. When we see good opportunities that fit our investment criteria, we execute.

Rahinsky: We are opportunistic. While we have taken more of an asset-light approach, acquiring and partnering with like-minded hospitality organizations, we are still investing and acquiring assets based off of our ability to bring value creation via performance.

Wolman: Our primary focus is on acquiring existing properties that align with our investment criteria. While we continuously evaluate development opportunities, current construction costs make it challenging to achieve attractive returns. We are actively pursuing acquisition targets within our core competencies: select-service hotels requiring value-add capital expenditures and repositioning. We are focused on aligning with capital partners that are looking to acquire new hotels, and our development team is working to source deals that align with their investment strategies and ours.

What do you anticipate for the remainder of the year and going into 2025?
Friedman: For the remainder of 2024, we anticipate a slight pickup in transaction activity, although the significant increase in volume is more likely to occur in 2025. The market dynamics, including potential interest rate cuts and the upcoming presidential election, will play crucial roles in shaping the landscape. We expect to continue our strategic and opportunistic acquisition approach, with the possibility of purchasing an additional two to four properties this year. Looking ahead to 2025, we foresee greater transaction activity as market conditions stabilize and more opportunities arise due to debt maturities and CapEx requirements.

Martin: It seems the mantra is hold out until some of the uncertainty has cleared. However, that is not necessarily how I see things playing out. First, you must believe that the near-term is better than the immediate term. While this may be the case on interest rates, it may not be in terms of demand drivers (market dependent). If you own in markets where you are confident that the micro fundamentals will allow strong demand growth and that your asset is physically capable of driving yield penetration (or can buy in these markets), you act aggressively. If you have doubts about the demand fundamentals in your micro market, have an issue with maturing debt or physical need, even though your returns many not reach your goals (or even result in a loss), you are better off selling.

Pierson: We believe we are in a normalized market environment with some potential, positive tailwinds of lower interest rates and lower supply growth, which bodes well for the future.

Rahinsky: As always, we are pragmatically optimistic, and our objective is not just to continue growing but to continue getting better and being more effective, ensuring that we consistently deliver superior value and experiences to our guests, partners and associates. We aim to maintain our momentum, focusing on expanding into strategic locations and partnerships.

Wolman: The operating environment is becoming increasingly complex for both owners and operators. While we expect to meet budget goals for 2024, the road ahead is not without challenges. Rising costs, particularly in labor, utilities and insurance, are compressing margins. Additionally, the potential for economic downturn and softening demand casts a shadow over future performance. From an owner’s perspective, these factors translate to lower returns on investment and increased financial risk. For developers, the challenges are magnified by escalating construction costs and the prolonged approval process. To mitigate these risks, strategic partnerships, innovative financing solutions and a focus on resilient asset classes will be paramount.