Economic optimism in 2018 led to higher U.S. hotel sales transaction volume and average price per key.

THE OUTLOOK FOR hotel transaction activity in 2019 is mostly positive, according to a report from HVS Consulting and Valuation. However, it won’t be quite at the level seen in 2018.

Last year was a time of high optimism in the market due to the election of the business-friendly Trump administration and the passage of the Tax Cut and Job Act in December 2017, according to an article from HVS Senior Managing Director and Practice Leader Suzanne Mellen. As a result, heading into 2019, hotel capitalization rates are stable, although hotel net operating income and values are somewhat suppressed by slowing RevPAR growth and rising operating costs.

It’s a scenario set up by the highs the market hit last year, Mellen said.

“The lodging sector attracted greater interest from investors looking for higher returns, and existing owners availed themselves of improved market conditions to strategically fine-tune their portfolios,” she said. “According to preliminary data generated by [Real Capital Analytics], single-asset and portfolio hotel sales transaction volume soared, increasing by a whopping 47 percent to $41.0 billion (from $27.8 billion in 2017), recording the second-highest volume in the last decade, though still well below the $50 million achieved in 2015.”

The average price per key for all sales of $2.5 million and over increased 21 percent from $127,000 in 2017 to $153,000 in 2018, driven by the sale of larger, higher-priced hotels. Total volume for hotels that sold for $10 million and over (major hotel sales) increased by 56 percent, while the number of hotels that sold in this price category increased by only 6 percent. Mellen said that indicates that larger, higher-priced deals drove the volume increase. The average price per key in that price range increased by 24 percent, from $221,000 to $274,000.

As 2019 continues, however, Mellen said hotels will struggle more to maintain NOI levels.

“Many assets will continue to appreciate, driven by outsized market performance, targeted operational strategies, and capital improvements. However, value declines will likely surface for some assets in annual financial reporting and in the sale and refinancing process,” she said. “Prudent hotel investors, operators, and lenders are proactively addressing this stage of the investment cycle.”

While Mellen predicts fairly strong hotel transaction activity this year, overall volume will be down. Slower RevPAR growth and increases in operating costs will take a toll on net operating income, and while demand will still be strong for many hotels, operating leverage will turn negative for many others, leading to possible declines in value.

“Hotel investment is a market-by-market, corner-by-corner business, and while some hotels will struggle during a slower growth period, others will continue to appreciate due to strong local market conditions and asset characteristics,” Mellen said. “Once the clouds clear, hotels should be able to once again benefit from the positive operating leverage that makes them attractive investments.”