‘Illusive Wave of Distress’ Keeps Hotel Bargain-Hunters Waiting

(Bloomberg) -- The global hospitality industry is coming off its worst year in modern history, but patient lenders and the volume of capital chasing distressed hotel deals are tempering expectations for large discounts.

That’s especially true because many of the private equity firms that have amassed billions of dollars in dry powder for U.S. commercial real estate deals are chasing a subset of properties poised for more rapid recovery, according to a report from JLL.

While lodging transactions have picked up in recent months as vaccine rollouts increase confidence in a travel rebound, investors are still waiting for the distressed opportunities that they have been anticipating since the pandemic forced thousands of hotels to shutter in the first half of last year.

“We’ve been calling it the illusive wave of distress,” said Gilda Perez-Alvarado, chief executive officer of the Americas hotel group at JLL. “There’s a bit of a supply and demand imbalance, and the weight of capital chasing that transaction may erode whatever discount the market was expecting.”

Sun Belt Targets

Private equity firms are targeting hotels that cater to leisure travelers in Sun Belt markets that were benefiting from demographic trends before the pandemic, Perez-Alvarado said.

Such properties are positioned to capture drive-to vacation demand, widely projected to bounce back before long-haul flights, corporate travel or group conventions.

Still, JLL expects discounts to eventually emerge in certain markets. Family offices are hunting for trophy hotels in New York, Paris, Hong Kong and other global destinations, seeking to score assets that rarely come to market.

Bargain-hunters are also looking for hotels that won’t fully recover until corporate travel departments are comfortable sending employees to group meetings and client visits. In some cases, investors are eyeing large hotels as potential conversions to offices or housing.

Such sales could drive a 40% increase in hotel transaction volumes in 2021, with most of this year’s activity to occur in the second half of the year, according to JLL.

Hotel transactions totaled $26 billion in 2020, down 60% from the year before, JLL said. Half of all deals closed in the first three months of the year, before it became clear how significantly the pandemic would disrupt normal life.

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