To no one's surprise, trading volume in the third quarter decreased by around 40% from the same quarter last year. As higher interest rates keep deal underwriting difficult, the bid-ask spread continues to be elevated. Owners with strong operating histories encounter buyers with an economic slowdown on their minds and, so far, neither side is willing to give. The highly anticipated 'wall of distress' has not materialized and from listening to industry participants, it is not clear that it will. At industry conferences borrowers bemoan the fact that not only are rates higher, but spreads have increased as well, putting continued pressure on interest rates up and down the debt capital stack.

Cap rate forecasts have been inching higher. Part of the calculus here was the contraction in cap rate premiums over cap rates observed in the office sector. Historically, hotel cap rates were 100 to 150 basis points higher than office cap rates. In the most recent past, this margin continued to contract, and the forecast is that office cap rates will rise, and that hotel cap rates, although higher as well, will have a smaller delta over office cap rates, down to sub-100 basis points.

Despite lower trading volume, some select deals are getting done. Ryman Hospitality Properties bought the 1,000-room J.W. Marriott resort in San Antonio to add to its stable of meeting-oriented hotels for $800 million. Blackstone was able to transact this property at a profit of over $120 million. In New York City, the Park Lane Hotel on Central Park South traded for just over $1 million/key for its 610 rooms to the Quatar Investment Authority. Just down Broadway, a triple-branded Hilton hotel, featuring a Hampton Inn, Home2Suites, and Motto, with just over 1,000 rooms, was sold for $470 million dollars from the developer to two separate entities. These deals signify that, for motivated buyers, financing costs are not as important a consideration as the location or a strategic rationale to own a property in a preferred market.

On the other side of the spectrum, hotels that relied on downtown transient demand and were hit hard over the past two years are seeing some interest, as well. Cases in point are two closed hotels: the Standard Hollywood, and the New York City Marriott Eastside, both selling for over $100 million in 23Q1.

Borrowers of two high-profile portfolios decided to stop supporting their loans, so industry participants are assessing the likelihood of these properties trading. Park Hotels and Resorts decided to stop debt payments on their two-hotel, 3,000-room, portfolio in San Francisco, the Parc 55, and the Hilton San Francisco Union Square. Subsequently, Morningstar decreased the value of these properties in their calculations by roughly $1 billion, from $1.5 billion in 2019 to $475 million today. And Ashford Hospitality decided to hand back the keys to a 19-hotel portfolio to the lender.

The Hersha take-private transaction by KSL for around $1.4 billion, at a 60% stock price premium, has so far not been a catalyst for future M&A activity. Hersha had signaled that they were looking for a buyer, and the deal gave KSL an easy way to expand its growing footprint by purchasing 3,800 hotels in 25 properties.

The transaction outlook continues to be muted as lack of clarity in the interest rate environment keeps buyers on the sideline. Rather than consummate deals, funds may be more likely to offer debt or preferred equity positions to allow owners to right-size their capital stack without giving up full ownership.

Here are several graphs illustrating the current national commercial hospitality market in The United States of America: