JLL’s Peek offers insight into deal dearth

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

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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

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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.”