The resort transaction market continues to face important headwinds. Investors are nonetheless involved concerning the prohibitive value of debt, and with the possibilities of a summer season price lower from the Fed turning into slimmer, costly debt might stay for the foreseeable future. Additional challenges to getting offers achieved are the bid-ask unfold, rising operational prices, and intensive change-of-ownership property enchancment plans (PIPs). As possession teams contemplate inserting their resort belongings available on the market, they need to contemplate how these headwinds are affecting purchaser underwriting in order that they’ve life like pricing expectations.
Based on the most recent RCA knowledge, Q1 2024 resort transactions within the United States declined 42% in comparison with the identical interval final yr. In phrases of the particular variety of trades, limited-service motels skilled a 19% decline, in comparison with a 31% decline for full-service motels. This helps what has been evident within the present pipeline and thru investor conversations: there’s extra curiosity within the limited-service and extended-stay segments.
Below are some pattern historic (throughout the previous two years) and present offers from the HVS Brokerage & Advisory pipeline for example the numbers from an inside perspective. It has been fascinating to see the shift in purchaser exercise inside this era.
Historical Trades
Hilton Garden Inn – Texas
- Sold in June 2022
- Days on Market (Initial Launch to Escrow): 29
- Number of Buyer Confidentiality Agreements (CAs) Executed: 93
- Number of Offers Received: 4
- Sales Price: $14,600,000 (97% of the Pricing Guidance)
Comfort Inn – New York
- Sold in March 2023
- Days on Market (Initial Launch to Escrow): 68
- Number of Buyer CAs Executed: 211
- Number of Offers Received: 16
- Sales Price: $11,125,000 (111% of the Pricing Guidance)
Holiday Inn – South Carolina
- Sold in May 2023
- Days on Market (Initial Launch to Escrow): 47
- Number of Buyer CAs Executed: 300+
- Number of Offers Received: 18 Fully Approved Auction Bidders
- Sales Price: $9,600,000 (107% of Reserve Price)
Current Trades
Holiday Inn Express & Suites – Texas
- Currently Under Contract
- Days on Market (Initial Launch to Escrow): 182
- Number of Buyer CAs Executed: 127
- Number of Offers Received: 2
- Sales Price: Confidential (88% of the Pricing Guidance)
Best Western – Texas
- Sold in May 2024
- Days on Market (Initial Launch to Escrow): 50
- Number of Buyer CAs Executed: 73
- Number of Offers Received: 2
- Sales Price: Confidential (91% of the Pricing Guidance)
The numbers present a story of two cities. The stark distinction evident between the historic and present trades is in each the variety of affords obtained and the gross sales worth as a share of the pricing steering. The resort transaction market from 2021 to early 2023 noticed aggressive purchaser exercise, and it was widespread to commerce an asset at or above the pricing steering; there was not a number of worth negotiation happening. During this era, low-cost debt was accessible, and with valuations at depressed ranges on account of COVID, there was a dramatic enhance in exercise from these in search of to capitalize on the lowered costs. Today, sturdy purchaser curiosity nonetheless exists, based mostly on the variety of CAs executed, however there’s a disconnect in advancing these patrons to finish property excursions and make affords. The disconnect is a results of two elements: 1) the bid-ask unfold between the pricing steering and what patrons are keen to pay, and a pair of) purchaser unwillingness to come back to phrases with the present state of the debt market time period with decrease loan-to-value (LTV) ratios and better charges.
Within the previous few months, extra possession teams have begun to come back to phrases with valuations, and lots of are keen to satisfy the market if they should promote. This has led to a sturdy itemizing pipeline for HVS Brokerage & Advisory, with extra itemizing engagement agreements executed in Q1 2024 in comparison with the identical interval final yr. When offering dealer opinions of worth (BOVs), we focus significantly on property taxes and insurance coverage. Many occasions, the year-one pro-forma might have a decrease net-operating-income flow-through as a result of giant rise in these fastened prices.
Regarding debt, patrons might want to perceive the present actuality and that the Fed’s choices are out of their management. A 0.25% price discount won’t materially change the return on funding, so a short-term change in charges shouldn’t have an effect on a long-term choice to accumulate an asset. Sellers have come down in pricing, so it’s now time for patrons to step up and bridge the hole. This would require patrons to develop into snug with the initially higher-priced debt, realizing that there are sunnier skies forward.
In addition, the earlier observe of benchmarking new development prices compared with gross sales worth has shifted, as lenders are utilizing “in-place cash flow” as their lending foundation, relatively than appraisal estimates. The once-standard observe of acquiring debt based mostly on a share of appraisal has modified to a foundation of straightforward money circulation to debt-ratio minimal thresholds.
Market suggestions from patrons point out that PIP bills (together with mid-cycle and alter of possession) have elevated considerably to anyplace from 25% to 45% above pre-pandemic ranges. Brands have lately instructed that the reserve norm for renovation prices, beforehand 4% of income, is now nearer to eight–9% of resort income over a ten-year possession cycle.
Many of the at present energetic purchaser teams perceive that the return goes to be back-end pushed when buying an asset proper now. The funding thesis is minimal cash-flow initially, whereas the PIP is carried out and the marketing strategy is executed, adopted by sturdy cash-flow within the latter years of the funding, then a large valuation enhance on exit when the resort is resold.
Being a prudent investor in at present’s hospitality market is troublesome, however not unimaginable. There are nonetheless many good offers available, and with some persistence and technique, your long-term returns might match and even exceed your expectations. As a vendor, the 1031-exchange program remains to be a viable tax various program that gives an interest-free mortgage from the U.S. authorities as you leverage their tax capital into a brand new funding. It is now extra necessary than ever to hunt an skilled transaction advisor that will help you navigate the market. Reach out to one among our HVS Brokerage & Advisory staff members to debate your present wants.