Posted July 1, 2021
Current lodging sector investment dynamics are quite unlike previous cycles.
As the pandemic progressed in 2020, many investors were faced with a high degree of insecurity about their ability to raise capital, the availability of assets in which to invest, availability of debt and other factors that would affect their typical capital investment practices. Much of that uncertainty has now gone away as the pace of investment activity has increased dramatically during the first half of 2021. The lodging sector, in particular, is experiencing investment dynamics that are quite different from the pre-pandemic norm.
Since the beginning of this year, our firm has successfully completed hotel transactions at metrics that would have been unheard of pre-pandemic. Today, it is not uncommon to have investors submit offers at extremely low capitalization rates, even when applying them to 2019 net operating income. It is clearly a seller’s market! In essence, investors are valuing hotels and resorts at low- to mid-single-digit cap rates on trailing-twelve-month net operating income levels that are, in many cases, 50% to 60% of what they were in 2019. We have also completed debt placement engagements where the loan-to-value is actually higher than the original loan being replaced – and at lower interest rates – on properties where net operating income is still one to two years from returning to stabilized levels.
Many longtime owners of hotels and resorts are seeking to capitalize on current market conditions. Veteran industry owners clearly understand that this may be the best opportunity for them to sell and realize higher proceeds than they might normally get for their properties. In other words, hotel owners are now enjoying premium pricing for the first time in over a decade. Some sellers have commented that they believe this is a generational opportunity to exit their hotel holdings.
Conversely, the make-up of investors seeking to buy hospitality properties is also somewhat different. While traditional private equity funds or public REITs are still very active buyers, many of the capital sources investing in the lodging sector today have previously dabbled in hotels only tangentially or not at all. Additionally, a number of high-net-worth individuals and family offices are now seeking to add hotels and resorts to their portfolio as they pursue cash-on-cash returns and benefit from the opportunity to enhance asset value over longer hold periods. How long these investment dynamics will continue is still very much up in the air.
Clearly, the hotel industry is nowhere near the peak of the pricing cycle. In fact, we’re only at the beginning where buyer pricing is historically the highest. Given the amount of investment capital seeking to invest in the lodging sector and the prevalence of readily available debt, we see no end in sight. In addition to single asset sales, industry consolidation is likely to occur at the operator level as well as with public companies. We at The Plasencia Group believe the next 18 to 24 months will be one of the busiest periods in history in terms of hotel transaction activity.