Getting used to the new cost of capital and equity investors
trying to pick their lanes has slowed deal flow, but Peek sees light.
NATIONAL REPORT – The hotel transaction market in the U.S.
is still quiet, even after last year’s less than remarkable reduction in the
Fed’s fund rate which resulted in about a 100-basis point reduction in SOFER.
There has also been positive movement in credit spreads,
more recently bringing down capital costs more than 200 basis points.
Commercial banks, CMBS, life companies and the debt funds
are reengaging to create a competitive and liquid debt market.
So, why does the hotel M&A market remain soft? Are
investors still getting used to the new realities of the cost capital? Many
would say that is a big reason behind the dearth of deals in the U.S.

There’s lots of equity in the market, but varying degrees of conviction. That’s really the question for us: how does that conviction evolve and start to lean in?
Dan Peek
Dan Peek, president at JLL’s Americas Hotel &
Hospitality Group, sat down with Hotel Investment Today at ALIS to give his
take on the current and near-term outlook for deals.
“There’s lots of equity in the market, but varying degrees
of conviction,” Peek said. “That’s really the question for us: how does that
conviction evolve and start to lean in?”
He added that equity is trying to find out where it wants to
play and how it wants to play. “There’s still a little bit of uncertainty
amongst certain equity investors on how they want to approach the business and
where they want to lean in,” Peek said. “That will change in 2025 and as a
result, as the year unfolds, we’ll see volume continue to pick up.”
Peek also said that while sub-$50 million trades and those
north of $250 million are getting done, the gap is in the middle with
traditional full-service hotels. “The portfolio transaction that usually is
dominated by what I would call mixed allocation, private equity (the
Blackstones, Starwood Capitals and Brookfields) has not been very liquid,” Peek
said. “In fact, that size transaction is at its lowest percentage in 15 years.”
However, Peek thinks that spigot will start flowing
certainly by the second half of 2025. “There are a lot of people thinking about
portfolio transactions and larger full-service deals,” he continued. “We had a
much later recovery in traditional corporate and group hotels in major markets
where there is now more momentum. That will lead to transaction activity
as those markets continue to recover. We’ve seen some activity pick up in New
York, which is usually a good sign.”
Hinderances, help
Another deal hinderance: Less-pressured sellers than you
might expect at this time in the cycle, according to Peek. There are some tough
markets and challenges surrounding labor, insurance and taxes, but hotels are
generally performing well. “So, I think lenders have been patient with their
hotels,” he said. “There is some pressure that will probably build as lenders
demand capital back, but there's less stress, and I think that’s one of the
reasons that volume remains muted.”

For the first time, really since before the pandemic, some Middle Eastern and European money is coming in. Asian capital is probably further behind, but I would say it’s starting now again. I would say that’s first inning activity.
Dan Peek
He points to three factors that could change the dialogue.
One, lenders are going to demand getting paid back. “We’ve seen a lot of
refinancing activity, which helps to address that. But people will be forced to
sell to pay off some loans,” Peek said.
Second is the significant CapEx needs in the market that
been addressed since before the pandemic. “That’s going to be a driving factor
relative to the brand relationship with a lot of hotels,” Peek said.
And lastly, Peek said there are a lot of fund investors out
there that are well past maturity. “They may say, at this point, let’s just
move on from that asset, take what we can get off the table,” he said.
All that said, Peek added that it still doesn’t feel like
the same pressures from past cycles where the lenders forced a lot of sales
volume. “We’re hopeful that the makeup of the buyer will result in a lot more
of the big private equity becoming engaged in more hotel investment in 2025,”
he said. “I would say private individuals, high net worth individuals, and a
lot of this hotel-focused capital that’s been raised has really been the
primary drivers.”
Peek said he is also starting to get interest from inbound
capital players. “For the first time, really since before the pandemic, some
Middle Eastern and European money is coming in,” he said. “Asian capital is
probably further behind, but I would say it’s starting now again. I would say
that’s first inning activity. They’ll call about one or two trophy markets like
New York and Miami, which is great and wonderful, but it’s not very diverse.”
He said more family office capital is moving out from being
fund investors and creating their own investment vehicles. “We see tech family
offices that are now invested in commercial real estate, inclusive of hotels –
both domestic and global,” Peek said.
Peek added that another challenge surrounding deal flow is
the realization of real EBITDA growth. “But in today’s market, with inflation
and slowing RevPAR growth, the underpinning value is muted supply growth. That
is going to be the key.”
Lastly, he said, everyone missed their forecast last year to
the high side in terms of what they expected for RevPAR. “So, you can sort of
say cautiously optimistically that everybody is being a little too conservative
this year in response,” Peek said.
Bottom line, Peek said there is a tremendous amount of
equity that’s trying to find a strategy, a home, a path. “So, hopefully, 2025
is the year we’ll see that come to fruition,” he concluded. We’ve been waiting
for a while.”