JLL: Profitability challenges, debt maturities to increase transactions

A total of $5.8 billion of U.S. hotel single-asset securitized loans, including CMBS and CRE CLOs, are coming due for maturity this year, according to JLL. Despite the industry’s strong RevPAR, there are multiple challenges that could affect refinancing of these securitized loans and compel owners to transact instead: profitability of U.S. hotels, high interest rates and high costs of property insurance, to name a few. We spoke with Ophelia Makis, senior research analyst, JLL, who gave us more insight:

Why is U.S. hotel profitability lagging? In which markets and what challenges is this presenting for hoteliers?

Hoteliers today are increasingly facing challenges in profitability as a function of increased property taxes, property insurance, labor costs and other operational expenses. As a result, U.S. hotel profitability continues to lag 2019 levels, with GOPPAR trailing behind by 2 percentage points. Financial stress from lagging profitability is particularly prevalent in the U.S. top-25 markets with GOPPAR behind 2019 levels by 20 percentage points, significantly more than the broader U.S.

Can you talk about interest rates and how these are affecting hospitality?

With interest rates hovering at a two-decade high and market expectations suggesting a lower chance of rate cuts for the remainder of the year, hoteliers and investors that have upcoming debt maturity deadlines will struggle with the additional financial strain of high debt costs.

What do transactions look like for the remainder of the year?

Despite subdued transaction activity through the first five months of 2024, there are many opportunities on the horizon expected to spur investment over the next 12-18 months. Expect profitability challenges coupled with impending debt maturities amid a high debt cost environment to be a catalyst for increased transactions.

What about the state of loans? What are you seeing and how will this affect investors?

According to our report on Impending U.S. Hotel Debt Maturities and Implications for Transactions, there is $4.2 billion in maturing debt volume that will face critical stress in 2024 alone. Transactions catalyzed by impending debt maturities are expected to be primarily driven in the top U.S. gateway markets given that 84% of the top 25 markets will be experiencing moderate to critical stress.

What markets should hoteliers look to for success for the remainder of the year?

Markets with diverse demand drivers, particularly select gateway markets such as New York, are likely to outperform and garner the most investor interest.