The current state of global macroeconomics is volatile and despite enormous liquidity in the marketplace the cost of capital to transact on hotel assets needs to become more efficient . With volatility comes opportunity . So , the big question for 2023 is when will that dislocation abate and how quickly will transaction volume come roaring back ?
Bill Grice , president of CBRE in the U . S ., expects the second half of 2023 to be the moment when the cost of capital aligns with sustained consumer demand to help facilitate more transactions .
“ Once we have more clarity on all the existential things that are going on abroad ; once financial markets have a better understanding of the trajectory of the Fed and have more data points on how the Feds actions are working to tame inflation ; once we have a clear path , I think you will see more lenders reengage and credit spreads will start to compress ,” Grice said . “ That will facilitate more transaction volume , but it will take it will take some time .”
For now , Grice said it ’ s a little bit of an ice bucket challenge for a lot of owners and operators that have to adjust to a higher interest rate environment . “ It changes the calculus on what you can invest in a property ,” he said .
“ You have to deal with a lot of different factors and , of course , inflation is kind of front and center .” At the same time , in fall 2022 the dislocation between strong industry performance fundamentals is juxtaposed with where the debt capital markets sat . “ There ’ s an immense amount of liquidity on the equity side of the equation ,” Grice said . “ You ’ ve also had a number of lenders recently that have tapped the brakes on financing opportunities .”
Pair that with higher interest rates , it makes it more challenging for hotel owner-operators to identify the most efficient capital structures . Grice suggests hotels that will struggle to meet the financing extension tests , those that are maturing , are going to have to source capital that is sometimes twice as expensive . “ With assets that might still be ramping up , that haven ’ t really achieved peak , it ’ s going to be challenging to deal with the increase in debt service and other inflationary pressures . So , we ’ re likely to see a period of distress in certain parts of the hospitality market .”
With this as a backdrop , HOTELS reached out to a number of lenders , brokers and consultancies to get their takes on the 2023 merger and acquisition climate . Here is what they had to say in November about a number of timely and topical questions :
HOTELS : What is the expected impact of higher rates on hotel distress and sales volume ? What segments will see the most volatility ? Denny Meikleham , Berkadia , Boston : From the seller ’ s and owner ’ s perspective , most had a record summer and fall and will even end 2022 with record profits . Unless they ’ re facing a debt maturity issue , most will hold their asset rather than accept a price reduction below what they feel their asset was worth back
ONCE WE HAVE MORE CLARITY ON ALL THE EXISTENTIAL THINGS THAT ARE GOING ON ABROAD ; ONCE FINANCIAL MARKETS HAVE A BETTER UNDERSTANDING OF THE TRAJECTORY OF THE FED AND HAVE MORE DATA POINTS ON HOW THE FEDS ACTIONS ARE WORKING TO TAME INFLATION ; ONCE WE HAVE A CLEAR PATH , I THINK YOU WILL SEE MORE LENDERS REENGAGE AND CREDIT SPREADS WILL START TO COMPRESS .
– BILL GRICE
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