Approaches Include Higher Offers, Shortened Timelines and Non-Refundable Deposits
The COVID-19 pandemic has created an uneven hotel deals market in the U.S., one in which buyers are paying above asking price for certain properties while other hotels go up on the auction block.
“I would say in my career, I’ve never had a market that is more divergent and disparate, in terms of what is out there,” said Mike Cahill, CEO and founder of Hospitality Real Estate Counselors.
Early on in the pandemic, many investors expected a wave of distressed assets going up for sale at significant discounts as struggling owners viewed selling off hotels as the only way to survive ongoing costs without any incoming revenue. Thanks to several rounds of federal assistance, flexible lending arrangements and stronger-than-expected leisure demand, the wave never arrived.
That has resulted in greater competition for desirable hotels that go on the market, which means buyers have had to sweeten their offers.
The Current Landscape
There are hotels up for sale where buyers are getting aggressive in their offers with earnest money deposits and competitive bidding through second or third calls for offers, Cahill said. At the same time, the auction companies are relatively busy.
The number of distressed deals won’t amount to what people anticipated, but there will be some being sold through auctions or through other deep discounts on pricing, he said. There is another market out there of owners who are happy if they can get 2019 pricing.
Cahill said what he finds interesting is the number of hotel deals coming in at or above 2019 prices while the Delta variant is still spreading.
“There’s something I think you probably wouldn’t have anticipated me telling you six months ago,” he said.
Many owners who have held on to their hotels are now taking another look at selling given recent valuations, he added.
Deal pricing is dependent on the markets, said Johannah Rodriguez, managing director of acquisitions at Driftwood Capital. There is discounting for some of the large hotels for corporate, group and convention guests in urban locations where demand hasn’t recovered yet. In the more leisure-driven markets, pricing can go above and beyond 2019 levels.
The competition for deals is surprising given how much the pandemic affected the transaction market only a year ago, she said. It was difficult to determine pricing and applicable discounts for assets in 2020, creating a large bid-ask spread for the limited number of hotels that were on the market.
By the fourth quarter of last year, there was an increase in transactions following news of the COVID-19 vaccines and the belief the end of the pandemic was in sight, she said. Though transaction numbers were still muted compared to 2019, the bid-ask spread started to decrease. The transaction market has picked up in each subsequent quarter.
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