Bifurcation continues in US deal market

NATIONAL REPORT - Select-service and luxury hotels are attracting the most investor interest, according to new data from JLL Hotels & Hospitality.

During the first half of 2024, select-service and extended-stay hotels saw a significant increase in demand, increasing 10 percentage points year-over-year to 57%. It is attributed to the appeal of smaller deals and strong performance levels.

Luxury hotels maintained their portion of single-asset liquidity in H1 2024 at 23%, consistent with the previous year. The strong operating performance and a growing base of high-net-worth travelers are driving the demand for marquee luxury hotels, especially those located in high-growth markets and urban centers.

JLL said this bifurcation for luxury and select-service and extended-stay assets is expected to persist through 2024, particularly in core urban markets.

Hotel Investment Today talked to JLL’s Global Head of Hotels Research Zach Demuth to get more insight about their new report.

Hotel Investment Today (HIT): Looking ahead and assuming lower interest rates by Q4, how will this research shift?

Zach Demuth: Barring there are more rate cuts than most expect, it is unlikely that these trends will change significantly. We have seen that these asset types continue to generate investor demand despite elevated interest rates. However, the financial pressures we have discussed widely, such as loan maturities, deferred capex, etc., are more likely to impact non-luxury, full-service assets given their general lag in recovery. We expect to see some of these pressures to spur transaction activity in the second half of 2024, although likely not to the degree previously expected.

In the past six months, we have also seen REITs come off the sidelines as many have healthy balance sheets following a period of pruning their portfolios, with luxury assets benefiting the most so far.

Zach Demuth

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HIT: Is the makeup of would-be buyers skewing any way within these subsets of bifurcated assets?

Demuth: Private equity continues to be the largest acquirer of hotels across all sub-sectors. In the past six months, we have also seen REITs come off the sidelines as many have healthy balance sheets following a period of pruning their portfolios, with luxury assets benefiting the most so far. On the select-service side, owner-operators and high net worth individuals have been the most active buyers.

HIT: How has price adjusted to the increased demand for select and extended-stay, as well as luxe properties?

Demuth: Select-service pricing has remained remarkably consistent, likely due to the sector's lean operating model and ability to generate stable returns for investors. Luxury pricing, on the other hand, has generally increased due to robust operating performance and heightened investor interest. However, pricing still varies depending on the market and specific asset.

HIT: This is working for core urban markets, but what about secondary and tertiary? Does the bifurcation persist or does data skew differently?

Demuth: Our analysis covers all markets across the U.S. It is challenging to isolate secondary/tertiary markets, aside from resorts, because of limited luxury supply and consequently limited transaction volume.

Select-service liquidity is generally stronger in non-core urban markets as they have a higher concentration of supply. However, there is also strong demand for select-service properties in urban markets, particularly those impacted by ongoing cost pressures, as select-service offers a generally higher profit model.