Deal flow expected to improve ‘slightly’: LIIC survey

DENVER – Although interest rates have decreased slightly and debt is available, the highly desirable assets in the U.S. still have not entered the transaction portal due to lingering hangovers from debt market costs, according to a new Lodging Industry Investment Council (LIIC) survey tracking investment sentiment and attitudes for the next 12 months.

The survey of investors, lenders, corporate real estate executives, REITs, public hotel companies, brokers and significant lodging equity sources who represent direct acquisition and disposition control of well over $60 billion of lodging real estate suggested that the underlying reason for the lack of deals remains the challenging bid/ask spread for premium acquisition targets. However, improving daily, more hotel owners are looking to explore selling properties and are accepting pricing reality. Overall, aggregate hotel volume transaction levels are forecasted to be up 10% or potentially greater by year-end 2024.

The four greatest threats to hotel investment, according to HREC Investment Advisors' Mike Cahill, the LIIC co-chairman who produced this year’s survey:

• Interest rate costs for acquisition debt: 68% of LIIC members are struggling with the cost of mortgage financing for their prospective deals.

• Change of ownership PIP mandates from brands: Costly and expansive PIPs from brands have emerged as a hotel investment threat for buyers and sellers.

• Availability of suitable acquisition assets in targeted IRR range: The ability of buyers to find premium purchase opportunities that achieve targeted IRR pro formas is challenging, as a function of the wide bid-ask spread.

• Mortgage refinancing challenges: Related to number one, investors are struggling to rationalize holding current hotels when refinancing at current terms.

Cap rates and transactions market. Hotel going-in acquisition cap rates appear to have stabilized with 64% of survey respondents viewing cap rates as stable or increasing slightly over the next 12 months. Fully, 75% anticipate the total dollar volume of U.S. hotel transactions will increase overall by year-end 2024 relative to year-end and 30% see the total dollar volume increasing over 10%. Commensurately, 74% of survey respondents predict the total number of assets sold by year-end 2024 to also increase.

Impact of hotel debt. Surprisingly, 79% of LIIC hotel owners responded that unfavorable debt refinancing terms have not impacted their decision to sell a property over the last year instead of holding. In addition, 57% still plan to refinance their existing debt in the next 12 months. Debt availability looks positive with 94% predicting stability or improvement. CMBS, debt funds and private money are forecasted to increase their lending significantly over the next 12 months.

Impact of inflation. Fully, 73% of investors believe the current inflationary environment has resulted in a value reduction and missing target IRRs for their hotel property investments. Also, 54% of respondents believe overall hotel operating fundamentals are worse than the pre-pandemic environment.

What do lodging investors want? Upper Upscale (44%) is the preferred target scale for buyers today; followed by upscale at 19%. In terms of what will transact, available hotels to purchase indicate that actual transaction volume will be roughly an equal spread from midscale to upper upscale.

Hotel buyers struggle finding product. Fully, 71% estimate that the quantity on the market is similar to or only slightly better than 2023. Of particular note, over half of those surveyed feel the quality is the same as 2023, showing a slow release to market for highly desirable acquisitions.

Where to buy a hotel. LIIC members were asked in which of the top 25 markets they would consider buying a hotel:

1. Boston, Massachusetts
2. Tampa, Florida
3. Nashville, Tennessee
3. New York, New York
3. Phoenix, Arizona

Where not to buy:

1. St. Louis, Missouri
2. San Francisco, California
3. Minneapolis, Minnesota
4. Detroit, Michigan
5. Chicago, Illinois/Los Angeles, California

New hotel development. Over the next 24 months, extended-stay hotels are expected to be dominant (45%) followed by upscale select-service (33%). Fully, 50% of LIIC respondents believes it is a good time to identify, tie up and pre-develop for new construction projects.

Hotel guestroom demand. Positively, 65% are cautiously optimistic that corporate travel is on a strong path to finalize recovery to pre-pandemic levels, and 74% anticipate that the group travel segment is going to achieve the fastest RevPAR growth over the next 12 months.

2024 U.S. presidential election. 50% of LIIC respondents anticipate that a Republican will win the 2024 presidential election, while 44% foresee a Democratic win, leaving 6% to favor other outcomes.

Hotel REIT stocks. Fully, 61% would not consider buying public hotel REIT stock today with their personal investment accounts.

Daily housekeeping. When checking into a midscale to luxury transient hotel, 43% of hotel investors still do not assume they will be provided with automatic daily housekeeping.