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Investors Hot For Hotels, Even Though The Hoped-For Discounts Didn't Materialize

At the beginning of the coronavirus pandemic, investors began licking their chops at the prospect of acquiring hotel properties at steep discounts. After all, travel was at a standstill, occupancies were plunging and hospitality revenues crushed.

Those early pandemic investor dreams didn't pan out, but that didn't keep investors on the sidelines for very long. By the third quarter of 2021, hotels were trading at a robust pace ahead of 2019 levels, in anticipation of a stronger revival of the hospitality industry in the not-too-distant future.


"I've heard people call the hotel market frenzied and also frothy," LW Hospitality Advisors President and CEO Daniel Lesser said. "I'm not sure those are the right words, but call it whatever you want, there's a lot of money chasing a lot of opportunities in the sector."

Hotels have been trading briskly lately as one-off sales, portfolio deals and hotel owner M&A. There were 90 single-asset hotel sale transactions over $10M each in Q3 2021, totaling $14.4B and including about 27,000 hotel rooms, according to LWHA data. In Q3 2020, LWHA tracked 12 single-asset sales of that size totaling only $829M, representing about 2,700 hotel rooms.

There were 302 hotel portfolio transactions in 2019 but only 91 in 2020, according to Lodging Econometrics. During the first three quarters of 2021, investors have inked 347 hotel portfolio deals. 

Some 676 hotel properties transferred to new ownership via mergers and acquisitions in the first nine months of 2021, compared with 75 property transfers in 2019 and only 40 in 2020, Lodging Econometrics reports

One of the headline hotel deals this year saw private equity investment giants Blackwood and Starwood team up to acquire Extended Stay America for about $6B, but that was just one of several 2021 blockbuster hotel transactions.

In the largest deal of the third quarter, a joint venture between the Cherng Family Trust and other partners paid more than $4B for the real estate of the 3,032-room Cosmopolitan of Las Vegas, while MGM Resorts International paid $1.6B for the operations. In other top deals, JBG Smith sold the 625-room Renaissance Arlington Capital View Hotel and Residence Inn by Marriott Arlington Capital View in suburban Washington, D.C., to Blackstone Group for $171.6M, and McSam Hotel Group sold the 520-room Hyatt Place New York City/Times Square to an unspecified buyer for $166M.

Buying trends appear to be continuing. 

After sitting in a selling season for several years, Sunstone Hotel Investors has shelled out nearly $443M this year in acquisitions, paying $265M for the Montage Healdsburg in Sonoma County in April, and an additional $177.5M for the Four Seasons Resort Napa Valley last month. 

The reason for the latter deal is essentially the same as it would have been before the pandemic, according to Sunstone: looking for yields in all the right places.

"The investment in the Four Seasons Napa Valley is [a] complement to our previous Wine Country acquisition, Montage Healdsburg," Sunstone Chief Financial Officer Bryan Giglia said during the company's earnings call in November. "Between the Four Seasons and the Montage, we will have approximately 10% of our asset value in one of the most supply-constrained leisure destinations in the country."

Investors are also keen on extended-stay properties, a product type that has fared better among hotel sectors since the pandemic. Brookfield Asset Management is looking to capitalize on that demand, as the firm explores the sale of its WoodSpring Suites hotels, a 92-property portfolio that could fetch as much as $1.5B. 

It isn't just sales volume seeing gains since 2019; hotel valuations are also reviving from pandemic-era lows, which weren't as low as initially expected. The JLL Global Hotel Investor Sentiment Survey, released in mid-2021, found an average cap rate increase of only 120 basis points globally in 2020 compared with 2019. Even the delta variant didn't derail valuation recovery this year very much, sources note. 

"The delta surge may be causing some investors to reconsider how aggressive they want to be, but other than that, it’s not affecting pricing," Green Street co-Head of Strategic Research Peter Rothemund told Bisnow in September, referring to lodging valuations.

"What's interesting is that while the fundamentals of the industry have rebounded to some degree, they're not back to pre-Covid levels from a profitability perspective," Lesser said. "Yet the pricing of hotels is, if not higher. So there's a bit of a disconnect."


From a demand perspective, hotels haven't made a full recovery from the blow the sector took in 2020, but that hasn't hampered investor optimism for 2022 and beyond.

U.S. average hotel occupancy stood at 62.9% in October 2021, down 8.8 percentage points compared with 2019, according to STR, while the average daily rate was $134.78, up 1.2% compared with the same month in 2019. Revenue per available room, or RevPAR, came in at $84.75 in October, down 7.6% compared with 2019.

Lesser said the money earmarked for discounted or bankrupt properties that never materialized is still seeking yield, and hotels are now looking better. Essentially, investors are betting that the worst of the pandemic shocks are past.

"After March 15, 2020, a massive amount of capital was raised for investment in the hotel sector, with the perception that there was going to be a massive wave of bankruptcies and foreclosures and discounts, but that never really happened," Lesser said. 

The thinking wasn't entirely flawed, he said, since the pandemic caused an unprecedented disruption in both business and leisure travel. Getting at least some hotel properties for pennies on the dollar seemed like a reasonable anticipation. But in the fullness of time, it turned out to be an erroneous assumption.

"A fire sale didn't happen because there was a general consensus to play nicely in the sandbox among all the various players in the industry — the owners, hotel companies, managers and especially the lenders who agreed to forbearance," Lesser said. "Soon into the pandemic, lenders decided they were in the business of lending money, not foreclosing on hotels and then figuring out what to do with them."

Another factor was the health of the industry going into the pandemic, Lesser said. The industry as a whole wasn't overbuilt or overleveraged in 2019, as it had been before past downturns.

Government support for the economy and the hotel industry specifically also helped stave off the complete collapse of the industry since the onset of the pandemic, via such facilities as Paycheck Protection Program loans and Small Business Administration loans.

"There has been a tremendous amount of stimulus money," Ridgemont Hospitality President Dhruv Patel said. "That's kept asset valuation propped up, to the point that no one expects now to let their assets go for pennies on the dollar." 

Despite the delta and potential omicron bumps, investors are further encouraged by the pent-up desire to travel, Patel said. Though leisure travel took a serious hit during the early months of the pandemic, it has recovered far more strongly than business travel. In fact, for those who can afford it, spending money on luxury travel has become a sort of carpe diem priority.

An early summertime 2021 American Express Travel survey of travelers with incomes of more than $70K found that 60% wanted to take a trip before the fall. While the delta variant put a pause to some of that travel, the desire was still there.

"The luxury travel market is expanding, and personal wealth is diversifying to a broader, younger market over the past year," Timbers Co. CEO Greg Spencer said. 

In October, Timbers, Wheelock Street Capital and the Ronto Group acquired South Seas Island Resort in Captiva, Florida, for just over $50M. 

"We felt this was an opportunity to not only pick up an asset with strong cash flow, but to secure land to develop at a really attractive basis," Spencer said, adding that Timber is looking at other acquisition opportunities including ground-up development, value-add repositioning or the rebranding of an existing asset. 

The missing piece of the relatively rosy hotel puzzle is business travel, which still lags far behind 2019 levels. There's a bit of optimism on the horizon: The Global Business Travel Association predicts that business travel spending this year will likely rise 14% compared with 2020, and make a full recovery by 2024.

"Industry-wide, we're not back to where we were just yet, but looking into next year, we're getting there," Reveille Hospitality CEO Marco Roca Sr. said. "Hotels have already come a long way, and investors believe returns will get better as travel returns, especially as business travel picks up."

CORRECTION, DEC. 15, 12:01 P.M. ET: In an earlier version of the story, the names of JBG Smith and STR were incorrect. The story has been updated.