During the second quarter of the year, U.S. gross domestic product declined 32.9 percent on an annualized basis, the most significant quarterly decline observed since the 1940s. And while the stock market has rebounded considerably from its lows and economic recovery seems likely, Daniel Lesser, president and CEO of LW Hospitality Advisors, suggests it will be a slow and very bumpy reopening of the economy.
In the company's "Q2 2020 Select Major U.S. Hotel Sales Survey," Lesser noted that legislators and public health advisors are struggling to balance a return to normalcy and the prevention of further contagion. With those concerns, and as long as the federal government is willing to print and distribute money, it would seem reasonable that the choice will be to opt to err on the side of preventing further spread of the virus, which will augur for a slower reopening, according to Lesser.
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The reversal of economic devastation will most likely be measured in years, Lesser wrote, and that does not begin to factor in the "unknowable implications" that will need to be dealt with as a result of massive government stimulus programs (both past and future) and inflation of its debt levels.
Economic downturns can present "wonderful investment opportunities," and similarly, Lesser suggests this downturn could produce a period that rivals the very best in both returns and depth of opportunity. Hotels have been one of the hardest-hit sectors by the coronavirus pandemic. Many property owners, seduced by historically low interest rates, entered this era with healthy levels of leverage. Now with severely impacted net incomes for most property types (specifically larger, full-service hotels), the seeds for broad distress are now planted, Lesser wrote.
Transactions
The newly released sales survey includes six announced single-asset sale transactions over $10 million, none of which are part of a portfolio. These transactions totaled roughly $246 million and comprised approximately 1,459 hotel rooms with an average sale price per room of roughly $169,000.
By comparison, the LWHA Q2 2019 survey identified 35 transactions totaling roughly $2.6 billion comprising 9,100 hotel rooms with an average sale price per room of $286,000. Comparing Q2 2020 with Q2 2019, the number of trades decreased approximately 83 percent while total dollar volume declined roughly 91 percent and sales price per room dropped 41 percent.
- The Buccini/Pollin Group acquired the 622-room Renaissance Baltimore Harborplace Hotel in Baltimore for $80 million or $129,000 per unit. In January 2020, BPG signed a contract to purchase the hotel for $100 million. During March 2020 when the COVID-19 crisis hit the U.S. in earnest, the seller, Sunstone Hotel Investors, agreed to lower its clearing price resulting in a 20 percent decline. This trade is the first major U.S. hotel sale transaction that has produced market-based evidence of perceived value erosion because of the COVID-19 pandemic.
- BentallGreenOak, Flank Management and Geolo Capital announced in June the acquisition of the Hutton Hotel in Nashville in an all-cash $70 million or $280,000 per room purchase price. The seller, Watermark Lodging Trust (formerly known as Carey Watermark Investors), reportedly acquired the property in 2013 for $73.6 million and The Wall Street Journal recently published that, “The 250-room hotel was valued between $90 million to $100 million before the COVID-19 outbreak, according to people familiar with the matter.”
- Pebblebrook Hotel Trust executed a contract to sell the 125-room Union Station Hotel Nashville, Autograph Collection in Nashville for $56 million or $448,000 per room to Southwest Value Partners. According to Pebblebrook, “The transaction is subject to normal closing conditions, and Pebblebrook offers no assurances that the sale will be completed on these terms, or at all. Pebblebrook is targeting to complete the sale in the third quarter of 2020.”
- Boynton Property Holdings purchased the Courtyard by Marriott Boynton Beach, Fla., for $19 million or $111,000 per room from Boulder Hotel Management. The deal for the 8.1-acre property included the 171-room hotel with 18 two-bedroom luxury townhouse rental units, a Buffalo Wild Wings restaurant, and a preschool.
- The 113-key Quality Inn & Suites by the Parks in Kissimmee, Fla., was sold by Rosemont Hotels for $10.6 million or $93,400 per unit to Japan-based Sarasa Hotels.
- The SureStay Plus Hotel by Best Western Clearwater Central, Clearwater, Fla., sold for $10.5 million or $59,000 per unit. Ahmed Kabani of Marcus & Millichap’s Miami office represented the seller, a private investor, in the transaction, while the undisclosed buyer was represented by a local broker. The 178-room hotel sits on nearly five acres of land and was originally built as a Hampton Inn.
Looking Ahead
While the post-COVID-19 environment may meaningfully reduce demand for commercial real estate, past downturns no matter how painful, have always been followed by recoveries during which new highs were achieved for both rental rates as well as property valuations, according to the survey. With the unprecedented amount of fiscal and monetary stimulus activity already committed to, and yet more likely to come, it is reasonable to expect that this trend will hold true once again in the coming years.
Although the world is currently in uncharted territory, having recovered from prior economic and demand shocks, America’s hotel industry has a proven track record of resiliency. The fact is that over a long-term basis, commercial real estate and particularly hotels offer superior risk adjusted yields compared with other investment classes focused on value-add opportunities, the survey states.