As the world emerged from a once-in-a-century pandemic, global and national events in the first three months of 2022 resulted in a quarter of transformation not seen in nearly 80 years. In the era of nuclear superpowers, the notion of a brutal unprovoked attack and invasion of a sovereign state was a fiction. “Never again” is a phrase associated with the Holocaust, the genocide of European Jews during World War II. Unfortunately, the expression is only two words because history is currently repeating itself in Eastern Europe.
At the end of the first quarter of 2022, soaring energy and food prices were major contributors to the biggest spike in US inflation in 40 years. Like many industries, the hospitality sector is facing supply chain challenges as well as unprecedented and growing labor shortages and cost difficulties with no immediate solution. The past two years will be seen as an inflection point influencing the economic, political and social paradigm shifts that will emerge over the remainder of this decade.
With COVID-19 beginning to be seen as endemic, many are optimistic that pandemic-related disruptions around the world will diminish. Gross Domestic Product (GDP) growth is expected to slow in 2022 and thereafter will continue to increase for the foreseeable future. Strong economic growth should support a vigorous recovery in accommodation.
Underscored by strong room rates, strong leisure footfall and a rebound in group business, the pace of travel recovery has been robust. Nationally, average room rates have exceeded 2019 levels for the past six months, and most expect substantial growth for the remainder of this year. Profitability in the hospitality sector, which declined significantly in 2020, has seen a significant rebound since the second quarter of 2021 and many believe it will reach 2019 levels by next year. Hotel values, which declined by an average of 25% in 2020, have mostly returned to pre-pandemic levels.
The LWHA Q1 2022 Major US Hotel Sales Survey includes 128 unique asset sale transactions over $10 million that totaled $7.9 billion and included approximately 26,000 hotel rooms with a sale price average per room $306,000. By comparison, the LWHA Q1 2021 Major US Hotel Sales Survey included 31 unique asset sale transactions over $10 million, totaling $8.1 billion and including approximately 17,000 hotel rooms with a price tag. average sale per room of $477,000. Venetian Resort Las Vegas & Sands Expo and Convention Center trade net that skews data, Q1 2021 stats equal 30 transactions totaling $1.85 billion, 9,900 hotel rooms with average selling price per room of $187,000.
- Comparing the first quarter of 2022 to the first quarter of 2021 (net of Venetian Resort Las Vegas), the number of transactions more than quadrupled while the total dollar volume also more than quadrupled and the selling price per room increased by about 65%.
By comparison, the LWHA Q1 2020 Major US Hotel Sales Survey (data reflects hotel sales price statistics before any impact from the spread of COVID-19 in the US) identified 30 transactions totaling approximately 1.97 billion, including 7,600 hotel rooms with an average sale price per room of $259,000.
- Comparing the first quarter of 2022 to the first quarter of 2020 (net of Venetian Resort Las Vegas), the number of transactions more than quadrupled, while total dollar volume also more than quadrupled and the selling price per room increased by about 18%.
Notable observations from Q2 2022 include:
- Twenty-six trades or about 20 percent of the national quarter total occurred in the state of Florida, followed by twenty-three trades or 18 percent of the national quarter in California. Combined, forty-nine trades or 38 percent of the national quarter took place in Florida and California.
- Seven trades, or about 6% of the national total for the quarter, took place in Arizona, all in the Phoenix metro area.
- Six trades, or about 5% of the national total for the quarter, took place in Colorado, all in the Denver metro area.
- Encore Boston Harbor, a 671-key luxury resort and casino in Everett, Mass., sold for $1.7 billion, or more than $2.5 million per unit. Realty Income (NYSE:O) has structured a sale-leaseback transaction that includes a triple net lease with an initial total annual rent of $100.0 million and an initial term of 30 years, with an option to renew for thirty-year-old tenant. Rent under the lease will increase by 1.75% for the first ten years of the lease and the greater of 1.75% and the increase in CPI over the previous year (capped at 2.50 %) over the remainder of the lease term.
- Nine sales in the first quarter of 2022 were made for between $100 million and $199 million each.
- Host Hotels & Resorts, Inc. (NASDAQ: HST) has acquired The Alida, Savannah, a 173-room hotel, for approximately $103 million or $595,000 per unit.
- Stonebridge Cos. sold the 230-room Hyatt Place San Francisco/Downtown to Dynamic City Capital for $105.9 million or $460,000 per key.
- DiamondRock Hospitality Company (NYSE: HRD) has acquired the 170-room Henderson Beach Resort in Destin, Florida for $112.5 million or $662,000 per unit.
- Driftwood Capital purchased the 326-key Scottsdale Resort at the McCormick Ranch in Scottsdale, AZ from Junson Capital for $113 million, or about $347,000 per unit.
- Tishman Hotel & Realty has acquired the 400-room Wyndham Grand Orlando Resort Bonnet Creek for $120.5 million or $301,000 per key.
- Sunstone Hotel Investors, Inc. (NYSE: SHO) sold the 368 Embassy Suites by Hilton Chicago Downtown Magnificent Mile and the 361-room Hilton Garden Inn Chicago Downtown/Magnificent Mile for a combined sale price of $129.5 million, or $178,000 per key. .
- The Irvine Company has sold the 295-room Fashion Island Hotel in Newport Beach, Calif., to Eagle Four Partners for $143.6 million, or about $487,000 per key. The hotel, which opened in 1986 and operated for twenty years as a subsidiary of Four Seasons, was closed in 2020 due to the pandemic and will reopen in 2023 as Pendry Newport Beach.
- JEMB Realty Corporation has acquired the 343-room Wyndham Grand Clearwater Beach in Clearwater, Florida from K&P Clearwater Estate LLC for $170 million or $496,000 per unit.
- Century Casinos, Inc. (Nasdaq Capital Market: CNTY) has acquired the 1,380-room Nugget Casino Resort in Sparks, NV from Marnell Gaming, LLC. CNTY acquired 50% of Smooth Bourbon, LLC (“PropCo”) which owns the land and building for $95 million and entered into a lease with Nugget Sparks, LLC (“OpCo”), for an annual rent of $15 million of dollars. The Company will receive $1.9 million per quarter (before any lease expenses) for its share of OpCo’s rent. Within a year, CNTY will buy OpCo for an additional $100 million and has a five-year option to buy the remaining 50% of PropCo for $105 million plus 2% per annum.
- Three Q1 2022 sales were made for between $200 million and $299 million each.
- A joint venture between Värde Partners and Hawkins Way Capital has acquired the 1,220-room Sheraton Boston Hotel from Host Hotels & Resorts, Inc. (NASDAQ: HST) for $233 million or $191,000 per key.
- Host Hotels & Resorts, Inc. (NASDAQ: HST) has acquired the 319-room Kimpton Hotel Van Zandt in Austin, Texas for $242 million or $759,000 per unit, a new record for the Austin metro area .
- Blackstone Group has sold the 715-key 45-acre La Quinta Resort & Club in La Quinta, California to Henderson Park for $255 million or $357,000 per unit.
- Two sales in the first quarter of 2022 were made for an amount between 300 and 399 million dollars each.
- The new 346-room W Nashville has been acquired by Xenia Hotels & Resorts, Inc. for $328.7 million or $950,000 per unit, a new record by far for the Nashville metro area.
- MCR has purchased the 1,780-key Sheraton New York Times Square Hotel from Host Hotels & Resorts, Inc. for $356 million or $200,000 per key.
- After two reported failed attempts by Fontainebleau Development to acquire the 1,000 key Diplomat Beach Resort in Hollywood, Florida, Trinity Investments acquired the property from Brookfield Properties for $850 million or $850,000 per unit.
Institutional investment platforms, many of which are centered around accommodations, dominated the hotel transaction arena in the first quarter of 2022.
- Examples of Buyers: AWH Partners, Chatham Lodging Trust, Crescent Real Estate Equities, DiamondRock Hospitality Company, Host Hotels & Resorts Inc., Driftwood Capital, Fillmore Capital Partners, Henderson Park, KKR & Co., Kor Real Estate Partners, LCP Group , Magna Hospitality Group, MCR, Mission Hill Hospitality, New Castle Hotels & Resorts, OTO Development, Peachtree Hotel Group, Procaccianti Companies, RLJ Lodging Trust, Stonebridge Companies, Tishman Hotel & Realty, TPG Capital, Trinity Investments and Xenia Hotels & Resorts, Inc.
- Examples of sellers (some of whom were also buyers): Alliance Bernstein LP, Blackstone, Brookfield Properties, Canyon Group, Columbia Sussex, Host Hotels & Resorts, Inc., Irvine Company, Junson Capital, Lightstone Group, MCR, Noble Investment Group, Northwood Investors, Peachtree Hotel Group, Procaccianti Companies, RLJ Lodging Trust, Starwood Capital Group, Stonebridge Companies, Sunstone Hotel Investors, Inc., Sydell Group and Wynn Resorts.
The fundamental trajectory and overall outlook for the US lodging industry looks positive. While leisure destinations continue to benefit from favorable supply and demand dynamics, which translates into pricing power, until business, group and international travel reappear fully and accommodation demand stabilizes again, creating a squeeze, many urban and suburban hotels will be challenged to benefit from large room rate increases. The recovery in the hospitality industry varies by segmentation and geography, which must be considered when analyzing national averages. In the near term, net new supply will be lukewarm as some hotels close permanently and new construction slows due to supply chain issues and rapidly rising material and labor costs. which will create problems of financial feasibility.
With compressed rates of return for other types of commercial real estate assets, investment interest in US hotel assets is expected to remain high. Additionally, as pandemic-induced forbearance periods end and brands increase product improvement requirements, many owners will be motivated to divest hotel assets during a rising market.
Daniel H. Lesser is President and Chief Executive Officer of LW Hospitality Advisors LLC.