FundFire – Hotel property owners surprised private equity and real estate managers last year by staving off distressed sales, but deals in the sector are finally taking shape as the Covid-19 pandemic’s devastating delta variant threatens another round of punishing lockdowns.
“The expectation is, with the delta variant, there is going to be a second dip,” said Deborah Friedland, practice leader in Eisner Advisory Group’s hospitality practice. “[Funds] will have another bite of the apple.”
Global hotel investment volume plunged nearly 60% last year during the early waves of the pandemic lockdowns, to just $29 billion, but has already hit $30 billion in this year’s first half, according to Jones Lang LaSalle’s latest hotel investment sentiment survey.
Similarly, Preqin data shows U.S. hotel private fund deal volume just under $13 billion in the first half, up 34% from a year earlier – and nearly matching the full-year 2020 total.
A handful of blockbuster deals has fueled the growth, chief among them the roughly $6 billion takeover of Extended Stay America by Blackstone Group’s real estate unit and Starwood Capital Group in June.
Sizable deals have continued since midyear, including a $211 million joint venture by Värde Partners and Flynn Properties to acquire a hotel portfolio owned by Apple Hospitality REIT, announced in August. And KKR and KSL Capital Partners had a major exit last month with the $2.7 billion sale of resort company Apple Leisure Group to Hyatt Hotels.
The market is still flush with cash for hotel dealmaking because investors mobilized last year in anticipation of mass fire sales, only to be disappointed. Hotel asset owners proved remarkably resilient, buoyed by government stimulus funds and unusual accommodations from alternative lenders, as well the dynamic of intense competition among would-be buyers.
“A lot of professional or institutional investors have geared up or had the dry powder waiting for the distressed purchases, but it hasn’t really happened,” said David Vincent, an investment specialist at Cadre, a real estate fund manager. “There’s been a wall of capital out there, a lot of money that is chasing these deals … so we haven’t seen the stressed sale prices.”
In the U.S., for instance, only seven hotel-focused funds have reached a final close since the start of 2020, securing $1.1 billion collectively, though adding in another 11 funds with 2020 or 2021 vintages that have had interim closes increases that total to $3.2 billion, according to Preqin data. And fundraising is continuing, including by new entrants.
“We are seeing more dedicated hotel funds that are coming to market, including smaller operators coming out with first funds,” said John Wasnock, director of private markets at Verus.
The deals that have come together have featured the corners of the sector that have performed the strongest through the pandemic: non-luxury properties with recognized brands or that cater to drive-through clientele, as opposed to business or international travelers. Known in the hospitality industry as “select-” or “limited-service” and “extended-stay,” such hotels have thrived owing to a surge in domestic leisure travel in spite of the pandemic and generally have suffered only limited cash-flow disruptions.
As a result, such properties were the targets not only of the Blackstone-Starwood megadeal and the Värde-Flynn joint venture, but also of more than $1 billion in “stressed and distressed” asset acquisitions in the sector by Peachtree Hotel Group since June 2020.
“We believe a lot of investors are taking note of the select-service and limited-service space, and we believe there will be, coming out of this cycle, the potential for some compression in cap rates from historic averages,” said Greg Friedman, Peachtree’s CEO.
Hotels broadly – and select- and limited-service properties in particular – have demonstrated their ability to rebound from devastating downturns, including after the 9/11 terrorist attacks and 2008 financial crisis, and there’s no reason to bet against them now, according to Friedman.