Despite Economic Hurdles, U.S. Hotel Transaction Deals Still Possible

Despite the economic uncertainty and disruption affecting the U.S. hotel industry, players in the transaction market believe deals can still be made, albeit more expensive and challenging. The situation is forcing hotel owners to decide whether to reinvest in or sell their properties.

Effects of Economic Uncertainty

The current economic situation has challenged the U.S. hotel industry, with transaction deals becoming more complicated and costly. Historically, hotel investments have been considered risky due to their unpredictable nature. However, the hospitality rate model has allowed hotels to quickly adjust rates to account for inflation, with the average hotel rate now about 26% higher than in 2019.

Due to inflation, the hotel market has bifurcated by chain-scale segment. While some hotels have managed to raise rates, this has left more price-sensitive consumers with fewer choices. Consequently, the recovery within the market is uneven, with high-end hotels recovering quickly while economy, midscale, and upper-midscale hotels struggle.

Financial Implications

Despite a drop in short-term floating interest rates, they remain higher than in previous years. The all-in interest rate for floating-rate borrowers is considerably higher than it was from 2009 to 2022. Refinancing at the same level is not currently feasible for property owners with a fixed-rate mortgage due.

Although money is widely available, it is expensive and comes with stricter stipulations than before. Some lenders are hesitant to finance hotel deals and development projects, creating a challenging environment for hotel development.

Investment Opportunities amidst Challenges

Despite the challenges, there are opportunities for deals in the market. Some hotels may not generate enough income to refinance efficiently or face deadlines for necessary maintenance or brand improvement plans. These situations create investment opportunities, and there has been a significant increase in foreclosure sales and note sales from banks and lenders.

Capital Expenditure Needs and Renovation Plans

Hotel owners typically underwrite deals with a 4% reserve of furniture, fixtures, and equipment (FF&E). However, this reserve is insufficient to cover the cost of major repairs. The hotel industry is currently behind in building up its reserves due to the pandemic, leading to underfunding of FF&Es and massive capital expenditure requirements.

In addition, hotel owners and operators are seeing price hikes in renovation plans due to new tariffs. Despite these challenges, there is optimism that trade deals will even out prices.

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