At the dawn of 2024, a U.S presidential election looms amidst numerous geopolitical challenges including two major ongoing wars in Europe and the Middle East which threaten global economic growth. The good news is, thus far it appears the U.S. economy has avoided recession with many now perceiving continued growth, albeit subdued. Inflation has cooled, the economy continues to add jobs, interest rates appear to have peaked and are anticipated to gradually decline for the next two years. Furthermore, a roaring stock market continues to fuel American consumer expenditures resulting in strong demand for travel including lodging.

Despite a resilient economy, 2023 was an about-face in the capital markets. Due to the swift and dramatic rise of interest rates, transactional market volumes have dramatically decreased. Bid/Ask spreads remain largely unsurmountable unless sellers are forced into a disposition or buyers are willing to trade at low capitalization rates despite higher borrowing costs.

Increased interest rates and inflation coupled with the persistence of remote and hybrid work arrangements have battered the U.S. commercial real estate sector, particularly the office market. Elevated vacancy rates and rising levels of loan delinquencies are challenging the ability of office building owners to refinance debt maturities, which has led to reduced asset pricing and distressed sales that impact the value of surrounding properties. Furthermore, a decline of foot traffic has had a compounding effect of reducing demand for restaurants and retail locations in numerous downtown urban cores.

In contrast and for the first time, the lodging sector has evolved into a preferred commercial real estate asset class due in part to the strong post pandemic recovery. Hotels have proven to be resilient, and an inflation hedge as sophisticated revenue management allows for dynamic pricing of room rates on a continuous basis. This is a phenomenon that is highly desirable during a rising market, however, can be an Achilles heel in a declining environment. Despite raised interest rates, the lodging sector is generating strong profits and investment yield opportunities.

While national hotel occupancy and ADR are still increasing, albeit modestly, RevPAR growth is anticipated to taper in 2024. It is noteworthy that all hotel chain scales are anticipated to experience increasing RevPAR this year. The bad news is that on an inflation adjusted basis, real RevPAR levels are not expected to return to 2019 levels until later in the decade. Additionally, rising operational costs are creating margin pressure for owners and operators. 

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Daniel Lesser
+1 212 300 6684
LW Hospitality Advisors LLC (LWHA)