As part of the Americas Lodging Investment Summit’s Patron sponsorship program, ALIS organizers asked HWE’s Dan Peek eight timely questions as we prepare for the 21st annual event January 24-26, 2022, at the JW Marriott/Ritz-Carlton Los Angeles L.A. LIVE. Following are his responses.
For ALIS 2021, you used “diverse” as the word to describe the U.S. hotel transactions environment. With 2022 right around the corner, what word or phrase would you use to describe the anticipation for next year’s hotel transactions environment?
Looking forward, we’d say the market is evolving and broadening. The supply of capital has grown, as has the confidence in businesses returning to their offices along with corresponding corporate travel. As such, we see the rise of traditional corporate and group assets as the next wave of investment targets, following the resurgence of leisure and select service sectors in 2021.
When considering all sources of capital—including banks, life insurance companies, debt funds, mezzanine providers, and CMBS lenders—which source(s) do you think will be the first to aggressively jump back into the hotel space? Why and when will it happen?
We see all sources as active today. Aggressive is a relative term, but clearly the market has favored acquisition versus refinancing, but we now have all sources active in both markets. Since the Great Recession, hotel lender underwriting has remained quite disciplined, and we expect that to continue to be the case.
What are the two or three hottest markets in terms of deals getting done? What’s driving that activity?
Since COVID’s initial impact on the hotel investment market, more than two-thirds of the investment activity in the U.S. has been in the southern half of the country and in California. The hottest markets have been the high growth southern cities (Austin, Nashville, Charleston, and Savannah, as examples) and resort destinations (Florida Keys, California coast). Behind all of that, of course, is the demand profile and sustainable performance of assets in those locations.
Assess the bid-ask spread at the moment. How does it compare to pre-pandemic levels and what will it look like in 12 months?
The story here again is about asset and location type. The market has generally met pricing expectations for leisure and select service offerings. The spread today is wider on corporate and group-oriented hotel, but available liquidity and improving fundamentals in those assets should allow it to close in 2022.
How will the labor shortage affect the hotel transactions environment? Will buyers be more wary because of the potential labor uncertainty?
Labor is a real challenge across the service industries, and investors will consider labor market conditions in their underwriting. Understanding the local market environment, which operators can best manage through the challenges and where staffing related service standards evolve will be key factors in investment.
What hotel asset type do you think will be the most popular to trade hands in 2022? Why?
As previously noted, leisure and select service assets were the most desired in 2021 and their attractiveness will continue. However, we do see a shift to corporate and group-oriented hotels, particularly urban, as businesses return to offices and corporate travel and the economy more formally opens up. Within that asset type investors will likely find interesting dynamics in terms of fundamental basis and clear upside to performance. It will also continue to be a sector with limited new supply given costs and competing interests for available land.
Which one or two overall economic indicators do you watch closely as the signal(s) for the next phase of the transaction market to begin? Why are those indicators important to you?
Today we look at indicators we’ve never considered before, including TSA passenger throughput and office access point volume. Beyond that, we will remain focused on interest rates, GDP growth and of course inflation. Closely monitoring international travel following the general reopening of the US in November 2021 will also be important.
What’s the most relevant bit of business advice you would give to hotel investors as they look to continue along the path to recovery?
There is no shortage of capital in the world seeking hotel investment. Those who typically succeed target the transactions of greatest interest to them and execute quickly. As I like to say, performance is currency. Those who effectively close transactions early in a cycle are positioned for success.
* Posted on November 15, 2021