As a an appraiser entrenched in the dynamic hospitality sector, my primary role is to serve as a mirror to the market, interpreting and reflecting its trends and transformations. Through recent data analysis and engaging with industry leaders and participants, here are some of the pivotal trends crucial for real estate professionals, hotel owners, operators and investors to monitor closely in 2024.

Positive Momentum with Increased Transactions

One of the most encouraging trends emerging from recent discussions is the overall positive outlook for the hospitality sector in 2024. Experts in the field are expecting a notable uptick in transactions compared to the previous year. Many see more agreement in new price discovery between sellers and buyers this year. This newly expected consensus will stem from various reasons, but impending large PIP updates from flags and looming loan maturities will be a notable catalyst from the seller’s standpoint. Furthermore, this optimism is fueled by the anticipation of a 1- to 2-basis-point decrease in interest rates, likely to occur in the third and fourth quarters. The expected rate cut is a mechanism that could release a wave of capital that has been patiently waiting on the sidelines for the right investment opportunities.

The Rise of PIP-Driven Sales

A substantial driver behind the surge in transactions is the resurgence of Property Improvement Plans or PIPs. Many properties find themselves at a crossroads, compelled to meet rigorous brand standards by revamping their color schemes, furnishings and overall aesthetics to remain competitive. During the peak of the COVID-19 pandemic, most hotel brands extended the deadline for mandatory renovations, providing temporary relief to property owners. However, that grace period has now sunsetted and hotel owners are facing the imperative to revitalize their properties.

Occupancy has rebounded since 2019, but the recovery journey has been uneven. While some hotel owners managed to build reserves during the post-pandemic ADR spikes seen in 2021 and 2022, others depleted their resources just to stay afloat. Securing financing for renovations poses a significant challenge, leading some owners to consider selling their properties instead of undertaking extensive upgrades. While the industry is not in a distressed state, prices are expected to normalize, presenting opportunities for both sellers and buyers to negotiate favorable terms.

Tax Assessments and Insurance Challenges

A surprising trend that warrants attention is the issue of tax assessments. Many municipalities suffered significant losses in tax revenue during the pandemic, especially from hotels, bars, and related businesses that experienced prolonged shutdowns. As a result, 2022 and 2023 witnessed municipalities aggressively increasing tax responsibilities for hotel owners. On top of this, insurance costs have surged in many markets—most notably Florida—adding to the financial burden of owners. However, there is a spark of near-term bright light: investors and industry professionals anticipate that both tax assessments and insurance rates will soon stabilize, allowing hotel owners to better plan and project their expenses moving forward.

Flexible Lending and Soft Landing

Lenders in the hospitality sector have expressed a strong reluctance to repeat the mistakes of the 2008-2009 financial crisis when foreclosures were rampant. They are now more inclined to work with property owners on a case-by-case basis, offering lower-interest loans and even bridge loans to help properties weather the storm. The consensus is that the industry is not headed for a precipitous drop, but rather a soft landing. Many lenders have solidified that their business plan is to lend and not take properties back. They do not “want the keys back” and are willing to work with borrowers as much as possible. That being said, many owners are expected to recapitalize their assets as needed and come to the table with new money. LTV ratios moving forward will be an interesting trend to watch.

The “Barbell” Investment Approach

From an investor’s perspective, the “barbell” approach has gained considerable traction. Investors are focusing primarily on two extremes within the market: luxury and economy segments. Within the economy segment, extended-stay properties are a focal point, particularly in light of the recently passed federal transportation bill, which is expected to boost demand. Luxury and ultra-luxury segments remain robust and resilient, seemingly immune to fluctuations in interest rates. These luxury property investors are also exploring opportunities beyond the traditional hotel market, emphasizing experiences over mere accommodation.

Lack of New Supply

One noticeable trend in the hospitality sector is the dearth of new ground-up supply. Securing financing for new construction projects has become exceedingly challenging, as lenders are showing more interest in financing renovations. Renovation projects provide an immediate return on investment compared to phased development. This trend is reshaping the competitive landscape, with established properties enjoying a significant advantage.

The Role of AI

Artificial Intelligence (AI) is poised to transform the hotel industry in 2024. Previously a topic of theoretical discussions, AI is now being actively implemented in booking and customer service operations. Top-tier hotel operators are embracing AI as a tool to streamline their operations, reduce labor costs and mitigate labor shortages. These advancements are crucial for ensuring efficient and seamless guest experiences in an era of heightened customer expectations.

Overall, the hospitality sector is navigating a complex yet promising landscape in 2024, marked by positive expectations, fast-changing market dynamics and technological advancements. Real estate professionals should closely monitor these trends to make well-informed decisions in this ever-evolving industry. Despite the challenges, the hotel sector remains resilient and adaptable, poised for continued growth and recovery in the latter half of 2024 and into 2025.

Story contributed by D. Michael Daniel Jr., MAI, national co-practice leader of Integra Realty Resources (IRR) Hotel and Hospitality Practice Group.