What to Expect From U.S. Hotel Dealmaking in 2023: Trophy Sales and Trauma

25.08.2023 - 14:17 / skift.com / Sean Oneill

Sales of hotel rooms are booming post-pandemic. But market turmoil will likely put most dealmaking for hotel assets on hiatus for the first half of the year.

A few exceptional bright spots for deal flow might be for large hotel groups acquiring small luxury and lifestyle brands and portfolios in popular destinations where they need to plug gaps in their networks. Deals for Dream Hotels, Viceroy, and Ace announced in the past several months suggest that some assets are recession-proof, given that those brands appear to have fetched prices similar to what they would’ve likely nabbed pre-pandemic.

Expect lifestyle and luxury to remain a safe haven of sorts in an uncertain first half of the 2023, according to several investment bankers and brokers at the Americas Lodging Investment Summit (ALIS) in Los Angeles.

A few factors have all but frozen significantly sized hotel transactions. Sellers are seeing strong cash flow thanks to the boom in demand and expect their properties to be valued more than used to be as a result. But the most reliable sources of financing are betting that interest rates will stop rising by mid-year and will be lower by year-end, making them reluctant to seriously look at deals now. Without the big money pl;ayers making competitive offers, sellers of hotel portfolios don’t have enough buyers to make them feel confident their assets are properly valued.

It’s anybody’s guess when interest rates will stabilize or begin to drop. If and when that happens, big money will return to hotel investing in a large way.

In the meantime, hotel owners in the U.S. have approximately $30 billion to $40 billion worth of debt that needs to be repaid or essentially refinanced, some investment bankers estimated.

For properties in markets that have been slow to recover from the pandemic-induced disruption, such as Minneapolis, San Francisco, and Houston, some hotel owners may get caught out. Owners who had a floating rate loan in the pandemic or before at about typical 4 percent rates may now face 8 percent rates, or double the interest payments.

Overall transaction volume in the U.S. may struggle to reach half the volume of 2021’s level, according to Jeffrey Davis, head of U.S. investment sales, JLL.

As in all markets, there are always exceptions. Trophy assets, or single properties that are coveted for status or bragging rights as much as potential returns on investment, remain attractive in the current market.

Interest in trophy hotels in hot markets, especially the Sunbelt cities of Phoenix, Nashville, Austin, and much of Florida, remains strong along thanks to the cash flow being generated by a surge in demand from travelers for these cities.

While institutional money may be cautious, the family