JLL’s Ketan Patel Discusses the Hotel Investment Landscape

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At the 2024 Hunter Hotel Investment Conference, the overall sentiment about hotel deals was that while rates and expenses are higher, deal activity is still occurring in the space. Many also expect the second half of the year to perform better than the first. LODGING spoke with Ketan Patel, managing director, JLL Hotels & Hospitality Group, about the segments and markets that are attractive to hotel investors and what’s coming for the rest of the year in the hotel investment landscape.

Select-service has been popular in the hotel investment space. What makes it so attractive?

The select-service segment has been popular given the stability of its operations and less variability, so owners gravitate toward that versus full service. Investors have always been focused on this, and investor interest in the space has only grown over time. Anytime we have a reset, people see that select-service and extended-stay hotels can survive and do well even in a very disruptive environment. When people see that, we start seeing more capital coming into the space. We’re seeing more and more institutional investors and groups that maybe historically didn’t invest a lot in select service now refocusing.

We’re excited. There’s a lot of optimism even with the rates in the markets still elevated. Lending is still tough, but the buyers are still sitting on capital, they want to deploy it, they want to be in this space, and they see an opportunity.

You mentioned institutional investors and groups that don’t historically invest in hotels are focusing on select service. Can you elaborate on what other investors are coming into the hotel space?

We’re seeing a lot more sellers that are putting stuff out to market and we’re seeing more buyers that stepped back in the last year [coming back this year]. A lot of folks were on the sidelines. When it came down to interesting deals, we had high-quality groups last year versus quantity. And now this year, we’re seeing a high quantity of buyers—high-quality groups are still there, they’re always going to be buying at every point, but now we’re seeing some of these investors that were a little shy last year. There’s less volatility in the markets today. There’s clarity around where the economy is headed, and people feel a bit better about investing. We’re seeing a lot of capital flowing.

Even at this conference, I met a bunch of first-time buyers. They came to the conference because they wanted to see what was going on in the space, and they wanted to put capital down. So that’s exciting that there’s all this interest. That’s only going to grow over time.

Can you explain some of the reasons investors prefer select service over full service?

The volatility in the business—select-service hotels are more stable from a performance standpoint. They’re more efficient to operate. Full-service boxes are reliant on multiple demand sources, like a convention center hotel … is going to be impacted during a downturn. And in COVID, big boxes were hurt. There’s not a lot you can do to pull the levers and bring people into a big box like that. But the select-service and extended-stay side, they were able to sustain.

The other big part of the reason why there’s interest: Those deals are a lot more financeable in today’s market. Smaller deals—call it sub $50 million, sub $40 million—buyers can source that debt through regional banks, local banks, and its relationship lending, so they’re able to get those deals done. When you’re getting into the $100 million space, your financing options are probably a little more limited, and it’s going to be a bit more challenging given where the rates are. The local banks, regional banks, these buyers are doing recourse financing. They’re able to get favorable rates compared to if you were to go out to a debt fund. That’s where their advantages are and why they can still execute.

What about the extended-stay space?

There’s a lot of demand for economy extended-stay. There’s a real demand and there’s a lack of supply in that space. That’s always the most popular asset type for institutional buyers, even private buyers. That’s an asset type that’s stable and performs well behind margins, but now you’re getting all this institutional capital getting into the economy extended-stay space. … It’ll be interesting to see how many of those get built, because, again, it’s still a challenging market to develop in. But a lot of these developers have signed agreements in a lot of markets, and they’re going to try to programmatically do it. It’ll be interesting to see how that progresses, but a lot of those brands are unproven brands. The space is driven off location and the demand drivers that typically feed into the economy extended-stay space. I’m very curious to see how that evolves over time because that’s a newer space.

Are there any markets that investors are currently targeting?

I’ve historically been a mid-Atlantic Northeast guy; that’s what I’ve done most of my career. I did a lot of business in that market. And the advantage we always had was that there was a deep buyer audience. If people want to own stuff and buy stuff close to home, there’s density and barriers to entry. Now what I found is you’re seeing capital want to go into more growth markets. The Smile States in the southeast, it’s Colorado, it’s Texas, it’s Nashville, anywhere there’s growth. People want to go into markets where there’s a growth story. We’re seeing a lot of capital now chasing deals. A lot of my clients that are here are from the Northeast. They’re not asking about what’s available in New Jersey. People are focused on [those markets] because that’s where all the growth is happening. Unfortunately, in the Northeast and more mature markets, you’re not seeing as much growth and new development.

It’s cheaper to operate in some of these markets, although expenses and labor costs have gone up. You’re still going to see lower taxes, lower insurance, those kinds of things. Even with those challenges, people still want to invest in [challenging] markets, and that’s all because of the growth. There’s population growth, companies are moving there, and companies are expanding. People see that, they know the long-term potential of these assets. There are also fewer barriers to entry in these markets, so you see a lot of supply growth as well. Although, right now, given where financing is and construction costs, if construction costs come down, financing loosens up, you’re probably going to see more developments. But right now, it’s definitely muted.

What’s coming for the second half of the year?

There’s going to be a lot more deal volume coming out in the second half, and that’s all driven by a variety of things, like debt maturities. We’re selling a lot of assets right now that are driven by debt maturities this year; people are just trying to get out ahead of it. We’re doing tons of work for institutional owners, private owners, valuing their assets. Everyone’s trying to figure out strategically what to do, like how they’re going to plan this out for the rest of the year. In the second half, you’re going to see a lot more product coming down. There’s a lot of product right now compared to this time last year, but it’s going to be more than that.

It’s been rocky, but again, I feel good about this year. Anything can change. You might get some bad news or something happens that could change things. On the rate side, if they drop rates, just from a market perspective, people will be more excited. That’s not going to change things dramatically in terms of pricing, but it will help a little bit because rates won’t drop that much—maybe over time, but not right away. But it will help.

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