An estimated $25B in US hotel deals have transacted this year as industry sees uneven recovery

The American Business Journals – The hotel sector continues to stare down a long road to recovery, and a summer boost this year was dampened quickly by the Covid-19 Delta variant.

As was expected, the U.S. hotel market saw a drop in occupancy in September, a decrease of 8.2% to a national rate of 61.6%, according to STR Inc. data released this week. Average daily rate, or ADR, was at $133.11, which was actually a 1% increase from August, and revenue per available room, or revPAR, dropped 7.3%, to $82.04.

But hotels continue to be bought and sold across the U.S., primarily in the southern half of the country, said Kevin Mallory, global head of CBRE Hotels and Americas senior managing director at CBRE Group Inc. (NYSE: CBRE).

So far in 2021, there’s been about $25 billion in hotel transaction activity in the U.S., with the year likely to end up around $35 billion to $40 billion in done deals, Mallory said.

“I think a big difference between the occurrence around Covid and other disruptions is that this one isn’t an economic-driven disruption,” he said. “We have strong liquidity.”

Still, hotels were hit hard — and still are, especially depending on where a hotel is located and the type of hotel it is — by the pandemic. Some hotels still haven’t reopened. A lot of capital was raised last year in anticipation of a wave of distressed properties, which didn’t bear out as much as the market expected.

“Those assets are generally being worked out,” Mallory continued. “They absolutely did benefit from the stimulus programs that were put in place by federal, local and state governments.”

An analysis by The Business Journals of hotel properties backing CMBS loans found 435 hotels nationally are in special servicing, are delinquent on loan payments or have matured and are non-performing, as of this week. Loans are sent to special servicing when a borrower falls behind on debt payments.

The debt carried by the hotel properties in special servicing totals nearly $9.9 billion.

The types of hotels in special servicing run the gamut — from the 1,048-room Fairmont Hotel in Austin, Texas, to a DoubleTree hotel in Wilmington, North Carolina.

Although all hotels have been affected by the pandemic, geography and the types of travel a market relies on have made a difference in 2021. Hotels in leisure-driven markets have generally outperformed cities that rely on corporate travel and group meetings.

Rachael Rothman, CBRE’s head of hotel research and data analytics, said rate growth for hotels has historically been modest because of a lack of compression nights, which are dates that see disproportionately high occupancy numbers — usually 95% or higher.

“That’s when you were really able to get peak occupancy and make the most of your rate gains,” Rothman continued. “These leisure-centric time periods are able to get compression nights, and that’s one of the biggest drivers of rate growth.”

Markets like Orlando, Florida; Miami and Phoenix have been able to achieve compression nights this year, which is driving rates.

On the other hand, cities like San Francisco and New York that are reliant on international and corporate travel continue to lag.

CBRE recently revised its short-term hotel-industry forecast after the Delta variant scuttled return-to-office plans for many companies, which in turn pushed back business travel plans.

CBRE is forecasting U.S. hotels will achieve a 2021 annual occupancy level of 54% and an ADR of $112.85. Projected revPAR is $60.91, compared to $42.97 in 2020 and about 29.3% less than the $86.16 revPAR posted in 2019.

STR’s most recently revised forecast in August also came with a downward projection. It predicts 2021 U.S. hotel industry occupancy of 54.7%, ADR of $115.50 and revPAR of $63.16, the latter metric being 25% below 2019 levels. STR doesn’t predict full revPAR recovery until 2024.

The impact from Delta will likely spill over into 2022, although CBRE is expecting occupancy gain of 8% next year, and a 7.1% jump in ADR.

It’s hard to know how the coming winter months will impact travel, Rothman said, adding a number of conferences have taken place this fall in warmer-weather markets where people can mingle both indoors and outside and centers with large meeting spaces. Convention markets in warm climates like Dallas, New Orleans, San Antonio, Las Vegas and Orlando, Florida, may disproportionately recover quicker.

Although Delta has affected the short-term recovery for hospitality, hotel real estate investors take a long view on their acquisitions, Mallory said. Hotels are typically held for at least five years.

“(Investors) are speaking with their dollars, and there’s a lot of dollars going in the sector and recapitalizing these properties,” he said. “You’d never buy a hotel if you thought it was going to be worse off tomorrow than it is today.”