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U.S. Hospitality Radar - December 2022

[video transcript]

In 2022 US Hoteliers sold 1.2 billion room nights, the ADR stood at an all-time high of $149, and RevPAR was $93, 30% higher than a year ago.

Happy New Year, my name is Jan Freitag, National Director for Hospitality Analytics, and here is what’s on Costar’s radar for this month:

Room demand recovered to 2019 levels in December, and for the year the difference in rooms sold stood at just 30 million nights. You can see, the difference is getting smaller and smaller quarter to quarter. Let’s see when we can get back to full-year 2019 results, keeping in mind that we are expecting a recession in Q2 and Q3.

As we all know, the demand recovery played out very differently, depending on the location or the price point. Urban locations are still hurting and likely will for a while until we figure out collectively what “return to office” looks like. And that means that Upper Upscale hotels that cater to business travelers are also impacted. Resort locations and Luxury class hotels are supported by strong leisure demand, but here as well we are curious to see how a recession impacts these numbers. We have heard anecdotally that small and medium-size businesses are the fuel of this business travel recovery. Suburban hotels and midscale hotels have benefited from this trend.  

So, on the demand side, the questions in 2023 are: how and when will corporate travelers return, and is there more fuel in the tank for growing leisure demand in a recession.

While we talk about Leisure demand, I want to highlight a new time series that is now available from STR and CoStar: Las Vegas Data. Here is a look at the 2022 results and they are unsurprisingly strong. Room rates grew 21% and occupancy was up 16%. And Las Vegas was also included in the STR Top 25 market list.

Let’s now look at the real estate side of the industry and discuss pipeline and investments. The pipeline continues to not really move, you see that in-construction count stands at 159,000 rooms, basically flat from last year. The early planning count shows developers are ready but I assume that interest rates have to ease before these projects break ground.

Well, if you can’t build you have to buy. Fourth quarter sales reached $11 billion, not quite the $15 billion we recorded in Q1 but you can see that we are on an upward trajectory. And actually, if you include the Vici-MGM sale-leaseback transaction the sales amount in 2022 was the highest ever.

So, deals are happening and I thought it was only appropriate to sit down with Mark Owens, the Co-Head for the Hospitality Capital Markets Group for CBRE to talk about the debt markets. Mark has very deep experience sourcing equity, but also restructuring debt and that is on a lot of owners’ minds right now. 

How should hotel owners think about the capital markets in 2023? 

You know, they should think about it as I think continuing to be volatile at least through the first or second quarter. And until we have clear messaging from the Fed on the overall interest rate environment, I think the positive spin to that is we have so much capital in the system both on the debt side as well as on the equity side, much of it has been on the sidelines for the last 9 months that has to be deployed. And so through that, I think we will start seeing some stability in the financial markets particularly around lodging as well as some spread compression once we start seeing those transactions that I mentioned and true data points. 

I think its still too early in the year at this stage to talk through those, but we do also have functioning markets, although they’re limited on the CMBS side, the life insurance company side, the bank side, and the debt fund side to a degree so we’re not in a period of liquidity constraints per se, its more of a period of dislocation and volatility and increased rates. So I think that the best approach is making sure you have sound advice. 

If you have upcoming maturities, really thinking about those maturities from a longer-term perspective and getting ahead of it versus trying to solve them in the short term and what we saw last year and the year prior is the market is incredibly inefficient which means when we go to market for our clients to source debt or joint venture equity we are going very wide. And it takes a wide approach because on every deal you have very different subsets of lenders and through the last 24 months there’s been very few repeat lenders so the market may not be as easy as a simple phone call for some of the groups out there that are used to just calling their relationships. It's really going to take exploring the broader market to find that lender that has optimal pricing for a particular asset and we saw that particularly over the last 9 months – I expect that to continue for the near term in 2023. 

Thank you, Mark, so much for your time. I thought his last comment was very telling: there are just so many players out there in the market, with very different return expectations. It's going to be very interesting to see how this year it all plays out as debt comes due that was financed a few years at maybe 3-4% interest rates. 

For now, let me thank you so much for watching, thank you so much for your time. If you have any questions, please email me at jfreitag@costar.com. Until next time, I wish you well, I wish you health.