To no one's surprise, trading volume in 2023 decreased by over 50% year over year. As higher interest rates keep deal underwriting difficult, the bid-ask spread continues to be elevated. Owners with strong operating histories encountered buyers looking for distress, and neither side was willing to give. Now that the Fed has signaled rate cuts in 2024, the expectation is that deal flow will increase again in the second half of the year. The impact of the Fed's action will likely be not only on interest rates but also on spreads, which in turn will restart activity up and down the debt capital stack.

Hotel cap rate forecasts have been inching higher. Part of the calculus 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, luxury class deals and deals in major markets 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. Early in 2024, Blackstone was also able to sell the Arizona Biltmore to a UK-based fund for over $1 million/key.

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.

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 transaction outlook for 2024 is constructive, with investors eager to get in on a commercial real estate sector that is poised for more growth.

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