Why Q4 may not be a ‘blowout’ for M&A

Historically, hotel investment activity tends to peak in the final quarter of the year. So, one would expect to see a surge in mergers and acquisitions in the hotel industry in the last few months of 2024. However, analysts are predicting a more moderate increase in deal activity, citing market uncertainty and ongoing cash flow challenges as potential impediments to a significant uptick.

Emmy Hise, senior director of hospitality analytics at CoStar, explained that while the recent rate cuts by the Federal Reserve have been beneficial for hotel values, they may not be sufficient to address the struggles many hotels are facing with their operating cash flow. This, coupled with lower revenue growth and higher expenses, is making it challenging for hotels to improve profitability.

While the fourth quarter of 2024 may see stronger transaction activity compared to the third quarter, especially for large trophy acquisitions or properties with value-add potential, uncertainties persist. Chad Littell, national director of US Capital Markets Analytics at CoStar, pointed out that despite the Fed’s rate cuts, treasury yields have actually increased since September, leading to higher fixed-rate borrowing costs for commercial real estate.

As a result, the expected surge in deal volume in Q4 may not materialize as some had hoped earlier in the year. Factors such as inflation trends and the 10-year treasury yield remain uncertain, contributing to a more cautious outlook for M&A activity in the hotel sector.

Looking back at the top hotel deals through the third quarter of 2024, some notable transactions stood out. The sale of The Ritz-Carlton O’ahu, Turtle Bay in Hawaii for $680 million was the leading deal in terms of price per key. Other significant deals included the Hyatt Regency Orlando, the Arizona Biltmore, and The Ritz-Carlton Key Biscayne.

Overall, while the outlook for M&A activity in the hotel industry in Q4 may not be as robust as initially anticipated, there is still potential for progress compared to the previous quarter. Market conditions and economic indicators will continue to play a significant role in shaping the landscape for hotel investment in the coming months.