Hotel Prices Outperform While Deal Volume Falls

Hospitality has found itself between two different trends of deal volume and pricing over a number of quarters, according to an MSCI report.

“With the way that deal volume has been falling, one might expect prices to be similarly challenged, but hotel property prices have generally outperformed commercial real estate in total,” they wrote. “The contrary paths of each measure are just another example of the mixed signals that have confused investors in the aftermath of the pandemic.”

The current disruption started in 2020 with lockdowns. Consumers and businesses cut back drastically on vacation and travel spending. “The hotel sector was reeling in 2020 given a combination of that shock to demand and the financing shocks from late 2019 on overbuilding fears,” MSCI wrote. “The RCA CPPI for the hotel sector fell a cumulative 4.8% from these shocks.” RCA CPPI, or Real Capital Analytics Commercial Property Price Index — a relative monthly measurement of commercial property prices.

Things improved in 2021 and 2022 as conditions improved and lockdowns ended, consumer travel picked up again in the form of revenge spending. The influx of money combined with very low interest rates helped drive up prices for properties. According to MSCI, the RCA DPPI for hotels grew 26% from their lows in 2020.

As MSCI noted, though, even with the growth of property prices, transaction volumes are down. Interest and mortgage rates have made purchases more difficult, so deal volumes have fallen for the last 12 months.

“The 69% decline in hotel property sales in November was something of a story of declines in portfolio activity,” they wrote. “Deals with such structures totaled only $20m in the month, down 98% from November 2022. Individual asset sales did also fall, down 57% from a year earlier, marking a bit of an acceleration of the declines seen in recent months.”

Looking at the transaction volume details, total hotel sales in November were $1.3 billion, down 69% year over year. Other year-over-year transaction falls by segment were 71% for full service; 68% for limited service; 57% for single asset; and 98% for portfolio and entity.

Looking at year-to-date through November 2023, total hotels were down 53% year over year. Full service was 51%; limited-service, 54%; single asset, 38%; and portfolio & entity, 85%.

Cap rates are currently around 8.5%, though they still have a way to go before reaching the upwards of 3.75% seen in pre-pandemic times.

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