Truncated Transaction Volume
There are many metrics to measure the relative health of the lodging industry, but while RevPAR and occupancy are the most widely reported transaction activity is a key part of the story as well and not surprisingly that story is not a happy one for hospitality right now.
Transaction volume in the U.S. has more or less ground to a screeching halt in recent months as the Coronavirus has reduced hotel demand and created a lingering question mark around asset values, according to Gilda Perez-Alvarado, CEO, Americas, JLL Hotels & Hospitality.
Perez-Alvarado acknowledged the uncertainty that exists in the market. “The hard thing I would say is there aren’t a lot of dots on the board right now. Less than 10 percent of all volume [thus far this year] has been happening in the last eight weeks. Until we see transactions actually close it’s going to be hard to keep a finger on the pulse [of the market],” she said, during a virtual event earlier this month.
The current pandemic has certainly been a major factor in not getting deals done. “The drop [in demand] has just been astonishing,” she noted. Perez-Alvarado pointed out that thus far year-to-date transaction volume in the U.S. is roughly $3.4 billion, which is 70 percent off the pace from the same time last year.
She went on to provide additional evidence. “Out of that [volume] 90 percent was booked in the first quarter so one would argue that was pre-COVID. Out of the total 50 percent was booked in January so there’s a lot of overhang [from 2019]. The reality is we’ve not seen a lot happen in April or May. We’re having a ton of conversation right now with investors, lenders, special servicers and everybody is just trying to make sense of the whole situation,” she stated.
One of the major obstacles to completing transactions has to do with the uncertainty around asset values. “The reality is that market participants do not seem unanimous in underwriting so there’s a very big bid/ask spread,” said Perez-Alvarado.
Nevertheless, Perez-Alvarado maintains there is still plenty for hoteliers to be bullish about going forward. “We’re still feeling pretty good about this space. There’s an insatiable appetite to find deals and hotel properties will continue to provide that,” she said.
Perez-Alvarado also insisted that there’s substantial interest from other asset classes to get into the hotel space and potentially acquire properties. “We’re seeing a tremendous amount of new entrants and these are all alternative users. We ran a few processes right now and the highest bidder ends up being an investor that’s going to convert the hotel into an alternative use. We’ve also seen a lot of low cost of capital coming to the sector from family, office, international,” she said.
Perez-Alvarado further added that low interest rates are expected for a longer period of time potentially boosting deal volume going forward. That’s just one reason that she believes the pace of deal activity is going to bounce back.
“We do believe that transactions are going to be back in earnest say by the end of Q3, beginning of Q4. This means 2020 may be a little bit of a right-off year for transaction volumes but 2021 should be very active,” stated Perez-Alvarado.
