As part of the Americas Lodging Investment Summit’s Patron sponsorship program, ALIS organizers asked CBRE’s Bill Grice nine timely questions as we prepare for the 22nd annual event January 23-25, 2023, at the JW Marriott/Ritz-Carlton Los Angeles L.A. LIVE. Following are his responses.
1) How has inflation and the threat of a recession affected the U.S. hotel transactions market?
Recent economic and geopolitical uncertainty resulted in a temporary moderation in hotel transactions over the summer, but we see strong momentum already building, indicating a reacceleration in transaction volume is likely.
2) Most forecasts show supply growth checking in at about 1% each year for the next two or three years. How will that affect transactions volume?
With new supply growth for the short to intermediate term trending below the long-term industry average, hotel investors have more reason for optimism going forward.
3) What’s the message to hotel owners, investors, and developers from the lending community in general as 2023 approaches?
There is a disconnect between higher interest rates paired with conservative lender underwriting and consistently improving lodging performance fundamentals. Given lodging’s relative outperformance versus other commercial real estate asset classes, lenders will ultimately be compelled to deliver more efficient financing executions than are currently available.
4) What is the outlook for CMBS markets as the recovery from the pandemic continues to solidify?
CMBS markets provide important liquidity to every commercial real estate property vertical and recent dislocation in the debt capital markets has delayed numerous new CMBS financings. Regaining momentum and a return to increased CMBS transaction volume is likely to occur once the market realizes more stability.
5) What hotel asset type do you think will be the most popular to trade hands in 2023? Why?
The assets that are most likely to trade hands in 2023 will be those where either value has fully recovered relative to 2019 or there is time pressure due to investment fund life, debt maturities, or other drivers. Over the past year, the majority of transactions have involved leisure-oriented properties and high-performing limited-service hotels where valuation met or exceeded 2019 levels.
6) What’s the most common question you are hearing from clients, and how do you respond to it?
The most common question we field from our clients is whether the broad-based increase in leisure ADR over the last 12 months is sustainable. Overall, we believe the reset in ADR for leisure properties represents a new normal supported by positive demand demographics paired with increased experience focused spending and broader corporate adoption of working remotely.
7) The ongoing labor shortage has presented issues for hotel owners. How has it impacted transactions, and do you see that impact growing or shrinking during 2023?
Although labor shortages can pose a significant operations challenge for some hotel owners, it has not had a noticeable impact on hotel transactions to date and we do not anticipate it will be a major factor driving transaction volume in 2023.
8) What’s the most under-estimated challenge the hotel industry faces, and why?
Development and renovation costs have risen dramatically driving two important outcomes. First, new supply is likely to remain constrained for the short to intermediate term as development costs have become prohibitively expensive in many markets. Second, property renovations can be materially more expensive and take longer to complete, which must be accounted for by hotel investors.
9) What’s the most under-estimated opportunity for the hotel industry, and why?
Historically, hotels have consistently generated real inflation adjusted ADR and RevPAR growth across numerous economic cycles. Given increases in the CPI since 2019, we believe there is still significant runway for incremental ADR and RevPAR growth, which many hotel investors may be underestimating.
* as of September 23, 2022