February 12, 2025
By Rod Clough, MAI, HVS President – Americas
In terms of the U.S. transaction market, we expect 2025 to end in stark contrast to 2024, with rising hotel values leading to a much more robust year of transaction activity and debt placements. The ever-present buyer-seller gap will persist, but it will likely continue to narrow. Buyers should be able to find increasingly better financing options; however, the cost of debt is unlikely to change significantly, with interest rates likely to remain stable for now. Sellers should continue to come to terms with unavoidable challenges that are restricting values on the expense side and property improvement plan (PIP) costs that buyers have to contend with, as these factors are not likely to subside any time soon.
Many lodging markets experienced a year of plateau in 2024, as occupancy struggled to remain consistent with the 2023 level. Some U.S. markets were the exception, such as Minneapolis, Seattle, and others that lagged the nation in their recovery post-COVID. The absence of Taylor Swift's summer concerts in 2024 was noticeable, and the shift of U.S. travelers to international destinations for their longer vacations did not help matters. Inbound travel (particularly from Asia) did not strengthen fast enough to make up for the loss of domestic travel; however, we expect some improvement in 2025. More state-side leisure travel is likely to return, corporate transient travel should remain on an upward trajectory as the return-to-office trend continues, and the outlook for group demand is positive. Overall, we remain optimistic that 2025 hotel metrics will improve from 2024 levels, even if just slightly.
Labor costs have risen significantly in this post-pandemic operating environment, and keeping turnover low requires more significant investment in payroll and the overall benefits package. Additionally, insurance costs remain an important factor, particularly in coastal areas that are affected by hurricanes and in fire-prone regions. We continue to see a wide range of profitability, and now is the time for owners to move on from management companies that have not been able to achieve appropriate returns from their assets since the pandemic (even given these unavoidable cost factors). Smart buyers also contract with separate, specialist firms to manage insurance costs and property tax assessments. Moreover, if a buyer can cluster a hotel with another owned property nearby, certain positions can be shared across the properties, thus reducing the cost burden on both hotels to create elevated GOP.
Lastly, renovations that have been delayed because of the pandemic are now coming due, and these are expensive. The rate pops that can be achieved post-renovation typically more than justify the elevated PIP costs that many of these hotels require in the year or two following the closing. Despite the ADR upside, any property that has opened since the onset of COVID and does not require these renovations will be a more attractive purchase in 2025.
For more information about U.S. markets or for help making informed investment decisions that align with your goals and risk tolerance, please contact Rod Clough, MAI.
Original article by HVS can be found here: https://www.linkedin.com/pulse/hvs-global-perspectives-us-2025-outlook-hvs-giije/
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