TRANSACTIONS :
WHAT ’ S ON EVERYONE ’ S MIND ?
Contributed by ERIC GUERRERO AND JAMES REBULLIDA , HVS
As hotel owners begin to navigate the post-COVID world , they are increasingly becoming more aware that it is important to “ right size ” their portfolio and dispose of non-core assets . With that , we have uncovered two topics on the state of the hotel transaction market that seem to be on top of everyone ’ s mind – what does pricing look like and who are the buyers ?
13 % year-over-year change in volume . Limited-service hotels represented US $ 2.9 billion of that transaction volume and will continue to be a sought-after asset class from buyers . When surveying the RCA Hedonic Series capitalization rates , full-service hotels were at a 7.7 % cap rate in Q1 2021 , reflecting an increase of 30 basis points ( bps ) over the
RCA HEDONIC CAP RATES purchase at a discount . Private equity companies and REITs have raised funds that strictly focus on distressed deals . While lenders are still hesitant on lending , many of these investors have been acquiring hotels with all equity or with very low debt . Most of the acquisitions by these firms are large portfolios , full-service assets in major metropolitan
WHAT DOES PRICING LOOK LIKE ?
The transaction market has gained steam this year , and we have been pleasantly surprised at the offer / bid activity on the transactions that we have marketed for sale , due primarily to all the undeployed capital that was raised during the height of the pandemic . Looking back at the distressed asset sales since the start of the pandemic , they have only accounted for 8.7 % of the overall transaction market .
With all the capital raised and the low supply of deals , investors have been aggressively competing against one another , resulting in upward pressure on pricing . The competitive environment has been beneficial to sellers by tempering the discounts to pre-COVID values . On transactions that we handled during the pandemic , we have seen discounts from as little as 3 % to as high as 35 %, compared to their pre-pandemic values . However , with the increasing buyer activity this year , we are expecting pandemic discounts to creep down to less than 10 % of their pre-pandemic value .
In Q1 2021 , there was US $ 5.6 billion in hotel transaction volume , representing a
Source : Real Capital Analytics
The RCA Hedonic Series ( RCA HS ) is an enhanced suite of cap rate and pricing time series which provide an alternative to RCA ’ s existing average yield and average price per unit time series . It differs from the average yield / PPU series in that the methodology reflects pricing for the average property rather than an average of the prices of properties that have transacted .
Q1 2020 cap rate . On the other hand , limited-service hotels experienced cap-rate compression and were at an 8.9 % cap rate in Q1 2021 , reflecting a decrease of 20 bps from the same period last year . Given that limited-service hotels have performed much stronger throughout the pandemic than full-service hotels , it is no surprise that the pricing has been compressed with all the buyer activity .
WHO ARE THE BUYERS ? With all the uncertainty surrounding the industry last year , we noticed an uptick of opportunistic investors with fresh capital seeking assets to areas , and mergers between companies .
On the other side of the spectrum , there has also been an increase of private investors seeking to take advantage of the government-backed SBA relief programs under the CARES Act . These acquisitions are typically single-asset trades with values below US $ 8 million . Through September 2021 , the SBA program offers new borrowers a reduction in origination fees and subsidies on the monthly principal and interest payments . We expect the activity in this segment to continue growing unless the government discontinues the program beyond September .
42 hotelsmag . com May / June 2021