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by Charles Oswald
The 35th Hunter Hotel Investment Conference has concluded, and here are a few key takeaways from this year's meeting of hotel owners, investors, and operators.
1. Transactions will accelerate. Major players like Blackstone, with $25B US hospitality assets under management, stated a target of $4B to $5B worth of hotel acquisitions in 2024. Brookfield stated a target of between $1.5B to $2B. This could be good news following a Q4 2023 transaction decline of -50%.
2. Unlevered rate of return (IRR) is improving, but the cost of capital remains a challenge. There is much optimism that the Fed will lower rates in the coming months, but that process has taken longer than previously anticipated.
3. A staggering $800B in hotel loans will mature in 2024. This total includes $200B already deferred from 2023, plus $600B coming due by December 31. This will lead to some transactions occurring under pressure of loan maturity at a time when a significant amount of hotel debt is considered stressed.
4. Renovations are overdue at many hotels. Tough credit markets, depleted FF&E reserves, and capital reserves locked up by lenders have led to many Property Improvement Plans (PIPs) being excessively deferred. The major brands are eager to get these PIPs complete.
5. The gap between Buyer and Seller price expectations is closing. Most properties are worth more today than they were a year ago. However, seller cap rate expectations are expanding vs. a year ago and the discount to replacement ratio can’t be ignored. Along with maturing debt, improving unlevered IRR, overdue renovations, and lowering interest rates, will lead to an acceleration in transactions in late 2024 and beyond.
6. New construction financing is still a challenge. Community and regional banks make up 70% to 80% of the commercial lending market. However, those banks are getting overallocated in real estate and facing regulatory scrutiny. This will lead to the need for other capital sources, bridge financing, and higher deposits to get new construction deals complete.
7. The extended stay segment is getting oversaturated. Several parent companies have added brands into the extended stay segment and investors prefer the efficient expense model that these boxes provide. Meanwhile, U.S. length of stay is shortening (-4% vs. prior year) and customers are seeking more premium experiences as evidenced by the Upper Upscale segment realizing the highest rate of revenue growth.
8. Supply growth is well below historic trends. In a market where supply growth has been slow and many hotels have fallen behind in CapEx spend and refresh, newly opened hotels will have a significant market advantage over their unrenovated competitors.
9. Management company matters. Identifying the right management company for your deal might be the single most important due diligence for a hotel owner. Whether choosing a company for their track-record of commercial strategy success, profit management, or to materially lower property insurance costs through a management company having a portfolio with geographic dispersion, choosing the right manager can substantially improve asset appreciation. Let us know how Aperture Hotels can help you!
