In the first half of 2024, total U.S. hotel transaction volume stood at $9.2 billion, down roughly 23% year over year, according to commercial real estate company JLL’s H1 2024 U.S. Hotel Investment Trends report, obtained by Hotel Dive. Hotel RevPAR remained “robust” in the half, though, with urban markets in particular showing promise for growth.
Hotel performance and investment in H1 were impacted by several factors, including changes in supply and travel demand, which will continue to guide investor activity as the year goes on.
In the report, JLL analyzed the trends that will shape hotel investment through the balance of the year and beyond, including supply growth, group travel and lender preferences.
Slow supply growth
U.S. hotel supply growth continues to lag as construction costs remain high and supply chain disruptions persist, according to JLL.
Supply growth has slowed the most for full-service hotels in urban and other high-barrier-to-entry markets where development costs have “soared.”
The average hotel development cost per key for an urban full-service hotel climbed to $742,000 in 2023, up 32% from 2019. Supply chain disruptions as well as rising labor and materials costs drove the cost hike, according to the report.
The acquisition cost per key for the same hotel was $456,000 in 2023, meaning it costs nearly 39% less to buy an existing urban full-service hotel rather than build a new one.
“The wide gap between the cost-to-buy and the cost-to-build presents a lucrative opportunity for investors,” the report noted. Because of this gap, JLL predicts investors will prioritize full-service hotel acquisitions in urban markets over development, in the short-to-medium term.
The gap will also spur increased brand acquisition, as hotel companies look to scale their portfolios, according to the report.
In H1, Hilton acquired college-town focused brand Graduate Hotels, assuming nearly 40 hotels through the deal. Hyatt also boosted its portfolio in H1 through its acquisition of the Mr and Mrs Smith platform, and the company is reportedly in talks to acquire Standard International.
Group travel resurgence
Investors will also remain interested in urban and other high-barrier-to-entry markets because they are experiencing “robust RevPAR” from the resurgence of group, corporate and international travel, the report detailed.
In the first half of 2024, urban markets generated the highest portion of hotel liquidity, underpinned by RevPAR gains, according to the report.
More than 20 U.S. cities saw a full recovery of group business performance compared to pre-pandemic levels in the fourth quarter of 2023. And increased group and business travel buoyed several hotel companies’ revenue gains in the second quarter of this year.
In the first half of 2024, the three markets with the largest hotel transaction volume were Phoenix ($971 million), New York City ($802 million) and Nashville ($582 million), according to the report. And each of these cities saw significant RevPAR growth in 2023 compared to 2019.
One notable deal in Phoenix in H1 was Henderson Park’s $705 million acquisition of the Arizona Biltmore.
Large transactions will be more prevalent for the balance of the year, JLL forecasts, as “more clarity emerges in the debt markets.” And real estate investment trusts, foreign capital and private equity are “likely to be the most active buyer types” in H2, the report noted.
Lenders favor hotels
A boost in issuance of commercial mortgage-backed security loans is also set to drive hotel deals in the second half of the year, as certain lenders continue to favor hotel loans because of their high credit spreads relative to other asset types, according to the report.
In H1 alone, CMBS issuance volume surpassed the entirety of 2023, the report detailed. As financing conditions stabilize, lenders — including debt funds, banks and select insurance companies — will increasingly pursue the hotel industry, JLL reported.
On the flip side, a high volume of loan maturities coming due by year-end will “catalyze transaction activity,” particularly for owners that “face rising cost pressures or impending [property improvement plan] requirements,” according to the report.
In May, JLL forecasted that more hoteliers would sell their assets to repay mature debt rather than refinance, as high interest rates and rising insurance costs make refinancing more challenging.
