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Hotels may be performing better than they did during the pandemic, but that’s not driving hotel property sales higher.
Individual hotel sales in California fell 45%, from 483 in 2022 to 265 in 2023, according to CoStar’s report on Atlas Hospitality Group’s annual year-end California restaurant survey. USD volume fell 56.3% to $3.75 billion – the second largest year-end decline in 15 years. It fell by 75% in 2009.
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“If I were operating today and my hotel was doing well, I wouldn’t be selling in today’s market because I’m used to the prices I was seeing 12 to 18 months ago,” Alan Reay, president of Atlas Hospitality Group, told CoStar.
Capital costs are what’s causing sales to stagnate. Higher interest rates can cause a property’s valuation to drop by millions of dollars.
The pandemic has resulted in higher sales prices due to lower interest rates and large amounts of accumulated capital. Federal regulators are trying to reduce the number of non-performing assets by allowing lenders to be more flexible. Stimulus money allocated to individuals and businesses also helps.
“A lot of tax revenue goes into the economy, so when hotels reopen, especially in resort areas, the numbers are off the charts,” Rey said.
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Investment volumes in California mirror national trends in 2023, when sales will fall to $50.5 billion, the lowest since 2021 (excluding 2020), according to commercial real estate firm JLL’s Global Hotel Investment Outlook report Amount of investment. The Americas and Europe, the Middle East and Africa (EMEA) experienced the largest declines relative to historical averages, down 29% and 43% respectively.
JLL’s report noted that “widespread capital market dislocations, particularly high interest rates across most of the world’s central banking institutions, have resulted in record low portfolio trading volumes and a decline in average transaction size.”
Although 1,404 transactions occurred in 2023 (the second most ever), the average deal size fell to an all-time low of $36 million. Single-asset transactions accounted for 79% of global hotel investment, the highest proportion ever recorded, while portfolio transactions fell 59% to $10.7 billion.
“Strong monetary tightening policies have led to volatility in global debt markets, making it difficult for investors to finance high-dollar transactions,” the JLL report said.
As hotels have become the asset class of choice for some institutional investors, first-time hotel buyers accounted for 19% of purchases that year. The hotel industry’s strong operating performance and the industry’s built-in inflation hedge mean this trend is likely to continue, with high net worth individuals and family offices likely to invest heavily in hotels.
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