agreement . Part of that sales velocity is due to pent-up demand from buyers , notes Earle B . Wason , CCIM , president of Wason Associates . In particular , properties in destination locations are hot , which is a key segment Wason Associates serves throughout the northeast . “ We were really in the right place at the right time ,” he says .
The outlook for the second half of the year is more uncertain due to a shortage of inventory . The volume of for-sale hotel assets on the market dropped considerably in July and August as both buyers and sellers pushed pause in the wake of higher interest rates . The summer months are often slow in the transaction market . With the Fed raising interest rates another three-quarters of a point in September , deal volume could be somewhat low through the end of 2022 .
In addition , the sales market has been bifurcated with properties that have recovered versus those segments of the market that have been lagging . For example , sale conditions for many urban hotels are still challenging . “ A lot of owners aren ’ t going to list properties unless they have to , because they know they would be selling at a discount ,” notes Wason . “ At some point , those locations will come back , but the question is how soon .” In some cases , owners have given those properties back to the lender , particularly those financed with non-recourse CMBS loans .
In contrast , cap rates in some destination markets have held relatively steady with very strong pricing . For example , Wason has seen some destination hotels in Portland , Maine , generate prices of $ 300,000 and more per key . However , with recent interest rate increases , cap rates for anything in the works are going to have to be higher , he adds .
CHECKING IN WITH HOSPITALITY
Some investors have viewed the disruption in the market as an opportunity to acquire assets at a discount to 2019 prices and / or to gain a foothold in desirable markets .
FEW VACANCIES IN DISTRESSED ASSETS The pandemic did create a significant amount of distress across the hotel sector , but the surge of distressed buying opportunities that many had expected to see never materialized . “ We were getting ready for a large wave of bankruptcies , but what we saw was that a lot of the banks and the CMBS special servicers reworked the debt ,” says Daniel Marse , CCIM , commercial sales and leasing at NAI Latter & Blum in Baton Rouge , La . “ I don ’ t think the banks wanted to take back the debt and have the liability associated with them ,” he says . According to Trepp , CMBS lodging loans that were 30 + days delinquent dropped to
Month-Over-Month Delinquency Rates by Major Property Type
14 %
12 %
10 %
8 %
6 %
4 %
2 %
0 %
Overall Delinquency Industrial Lodging Multifamily Office Retail
Jul . 2021
Source : Trepp
Aug . 2021 Sep . 2021
Oct . 2021 Nov . 2021
Dec . 2021 Jan . 2022
Feb . 2022 Mar . 2022
Apr . 2022 May 2022
Jun . 2022
Jul . 2022
5.6 percent in July compared to 12.94 percent a year ago .
Some investors have viewed the disruption in the market as an opportunity to acquire assets at a discount to 2019 prices and / or to gain a foothold in desirable markets . For example , New Orleans is a high barrier-to-entry market with limited land availability , which makes it challenging to build new properties . “ I think a lot of hotel investors are looking at the current market as an opportunity to buy ,” says Marse . The New Orleans market saw RevPAR drop by 60 percent in 2020 , and some industry experts are not predicting a full recovery in the Big Easy until 2024 . However , several large institutional sales have been completed over the past 12 months , he says .
Values have held up better than people thought in certain markets . Data from the Green Street Commercial Property Price Index shows that lodging prices for July were up 8 percent year over year and up 1 percent compared to pre-pandemic pricing . Where values have eroded is in the urban and suburban locations that are more dependent on business travelers . In those cases , the current cash flow doesn ’ t warrant the cap rate that existed pre-pandemic . However , the market for destination hotels has remained very strong , with revenues in many cases above where they were pre-pandemic , notes Wason . “ There is a lot of money chasing deals ,” he says . “ I ’ ve seen some resort portfolios sell for prices that I never dreamed would happen , but that ’ s because these buyers have cash that they need to put to work .”
DEVELOPERS FIND ROOM FOR OPPORTUNITY It ’ s no surprise that the development pipeline has thinned , given some of the market turbulence over the past two years , not to mention challenges presented by higher construction and financing costs . According to STR , construction activity declined for the seventh straight month in June , with 149,198 rooms under construction . “ Once the investment climate gets a little bit better , I think we will see that climbing back up again ,” says Wilson . STR is reporting an additional 281,190 rooms in the planning stage .
Some developers are pushing forward with new projects . For example , Irvine , Calif . -based Shopoff Realty Investments is developing Dream Las Vegas on a prime 5.25-acre site on the Strip . Shopoff Realty acquired the site in a joint venture with Contour Real Estate just prior to the outbreak of COVID-19 in February 2020 . Construction is now underway on the 20-story resort hotel that will include 525 rooms and suites , gaming , dining and nightlife , retail , meeting rooms , pool deck , and a fitness center . Branded and managed by the Dream Hotel Group ,
Previous spread by Bert Lmann
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COMMERCIAL INVESTMENT REAL ESTATE MAGAZINE FALL 2022