By Andy Wimsatt, Head of Hotels & Hospitality, Berkadia

Over the past 18 months, the commercial real estate industry has faced headwinds stemming from rising interest rates and widespread economic uncertainty. Turbulence following the collapse of several regional banks and tightening credit standards from financial institutions has resulted in a slowing of transaction activity across the CRE industry, including the Hotels and Hospitality sector.

Despite these conditions, deals are still being done – just at a more moderate pace. When examining trends across the sector, the outlook for the Hotels and Hospitality sector emerges as cautiously optimistic.

Market Trends Across the Hotels Industry

Despite economic uncertainty, the fundamentals in lodging remain stable at the moment. Inflation can be helpful for hotels since they set their rents on a daily basis – it’s easier for hotels to move revenues on pace with increasing expenses. However, with rising inflation comes rising costs for food, beverages, and other supplies needed to operate. This could result in higher prices for the consumer and potentially reduced demand for hospitality services as consumers limit discretionary spending. While the industry is currently experiencing strong occupancy rates, it continues its recovery following the 2020 pandemic.

For most leaders in the space, and like many other industries, the primary concern is rising cost and scarcity of labor. Hotels experienced a major workforce shortage that greatly impacted recovery in the sector. Unfortunately, this is a consumer-facing job that doesn’t offer a work-from-home option, so hotels are pressured to attract strong service workers who, in many cases, must commute long distances to get to work. To combat the labor shortage, hotels are having to increase wages, offer greater flexibility of hours and expand benefits.

Despite inflationary concerns and labor shortages, the supply pipeline is largely in check thanks to high building and borrowing costs. Additionally, investors have the ability to acquire hotels below replacement cost. High borrowing costs have had a significant impact on the transaction market this year. Most investors do not want to acquire a hotel by borrowing money at a cost that exceeds the cash-on-cash yield of the hotel. As a result, transaction volume is well below prior years. There are exceptions, of course, those being hotels with assumable debt priced below current interest rates; hotels that can be acquired with seller finance; or in certain cases, hotels that are acquired all cash. With the Fed signaling “higher for longer,” Berkadia Hotels & Hospitality expects this dynamic to remain unchanged through the first half of 2024.

Reflecting on 2023

As we reflect on 2023, it has become evident that this year has been an informative one for the industry. After unprecedented challenges caused by market uncertainty and lingering effects from the pandemic, this sector has showcased resilience, adaptability, and innovation. Key trends that have emerged in 2023 include the adoption of new technology to enhance guest experiences such as AI, a renewed commitment to sustainability and responsibility, and a passionate workforce that are excited about the new opportunities for 2024