Hospitality Investing News - Southwest February 2024

The Latest in the Southwest Hospitality Market

Hotel transaction volume fell in 2023, and while there are myriad reasons why, the higher cost of capital is a main driver. To put it in perspective, however, 2022 was one of the stronger years relative to 2019, which was not a particularly robust year. Compared to 2019, this year is down about 8% to 8.5%. The capital markets dislocation, the Federal Reserve’s tightening process and raising fund rates roughly 500 basis points compared to March 2022 have driven up the cost of debt which is precisely what’s driven down what buyers are willing to pay for assets, and in many cases, it is below where sellers are willing to sell, hence a fairly sizable bid-ask gap and also the significant reduction in transaction volume. the market wants clarity and, ideally, reasons to be optimistic.

Currently, there’s more clarity looking ahead than there was previously, and there’s generally a view that the Fed has inflation under control, so the tightening cycle may be over. More high-net-worth investors are diversifying from other asset classes and looking to move into the hotel space. Investors can generally get a risk premium on their capitalization rate relative to other asset classes, and the fundamentals continue to be incredibly strong.