Consolidation in ownership should allow hotel owners to be better prepared for a slowdown - by Earle Wason

As we enter the half-year point of 2024 there is becoming clarity in the hotel market sales and revenue expectations. In all my 50 years as a Realtor this continues to be the craziest and most unpredictable period I can remember. However, the effects of an election year, war in Ukraine and Israel and the turmoil in the Middle East which could all impact the economy of the United States at this point is still difficult to read.

Looking back at the years 2021, 2022, and 2023, again my firm, Wason Associates, had three of our best years in hotel brokerage transactions and dollar volume. At this point our firm has closed some very good transactions including a recent sale of a Hilton Garden Inn for $23 million. The increase in the interest rates has had effect on the hotel sales activity, interestingly the demand to purchase has still been very good mostly from regional-based hotel companies that currently own multiple properties. Private equity groups were looking and to some degree still looking for upscale destination resorts, however, the difference at this time; interest rates on non-recourse loans have increased significantly; if you can find a lender at all. This has brought hotel values down and most hotel owners are not ready for that. As a result, we have the lowest inventory of product for sale that we have seen for years.” The number of lenders who have given up on providing hospitality loans increases daily. Many loans that were written at the very low interest rates will become due soon, could there be hotels “underwater”, only time will tell.

Interest rates have increased even further as they are 10% or more for non-recourse lending and 7.5% to 8.5% for recourse lending. The Feds  indication interest rate drops in 2024 looks to have dissipated as inflation continues to be problematic. A number of regional hotel companies are indicating that the current capitalization rates cannot be less than 9% and that is an all-in rate after any potential PIP. I felt that 2023 would see a small drop in occupancy and it did with similar results forecast for 2024.  Also “Average Daily Rates” have leveled off with 2022 and I suspect that for many hotels room rates will continue a small decline.

Many economists were with predicting the economy to slow down by the middle of 2024, and a soft landing likely, however, “so far so good”.

As I have written repeatedly. “One of the biggest plagues against the hospitality industry and there has been no change since 2021, as the continuing staffing problems in all New England hospitality properties continues. For many resort locations lack of housing is becoming one of the big issues. Hoteliers and restaurateurs are purchasing housing for their H2B and J1 visa workers but due to the homes values in the resorts it can be impossible to find and therefore employees may need to be bused from as much as an hour away from the facilities. Many restaurants have been closing two or three days a week because they cannot find the staff. I have heard from hotel owners who are concerned that rooms will remain vacant as there are not enough staff to get them cleaned. Hospitality workers’ wages must move up and significantly: the minimum wage means nothing. Owners are adjusting, upwards, salaries and hourly wages. Food and beverage outlets have had to “dumb down” their menus and review changes to the current business models. The result has been the similarity of restaurant menus among different operators.

Clearly an increase in the workers from the H2B and J1 program could help. There were around 200,000 requests and the actual numbers were closer to 45,000. The Washington attitude that these workers take good American jobs clearly shows how myopic our Washington representatives have become. 

Many of my clients expected a fall-off in the past three years and have planned for it. Interestingly the huge consolidation in ownership in our industry should allow hotel owners to be better prepared for a slowdown which many believe is forthcoming. This consolidation since the early 1990s has resulted in a 60%+/- reduction of all hotel owners here in New England and the owner operator model has shifted to just smaller motels and inns.

The upcoming election will be a clearer expectation as we have two older gentleman running for office with distinctively different philosophies and for the first time both candidates can only serve for one term and will be a lame-duck President from day one.

Earle Wason, CCIM, is president and owner of Wason Associates Hospitality Real Estate Brokerage Group, Portsmouth, N.H.