The big interview: Ed James, managing principal, Mumford Company

US-based hospitality real estate specialist Mumford Company has an expert knowledge of the country’s hotel brokerage market, so THP News quizzed the company’s managing principal on how the industry currently stands.

Ed James outlined where the US hotel development hotspots are and which segments are proving the most popular.

How do you feel the US hotel transaction market has performed throughout 2022?

2022 started with a very deep and active pipeline of transactions. Interest levels from both buyers and sellers were extremely high, and financing for acquisitions was readily available at historically low-interest rates. As we entered the late spring and summer, interest rates began to rise dramatically, along with a steep increase in inflation. As we close 2022, we see a significant decline in the availability of acquisition financing, buyer demand, and, ultimately, the pace of transactions.

Have you seen an increase, decrease or maintenance in the level of distressed assets for sale?

Due primarily to the fundamental strength of the underlying US economy, hotels have continued to perform well in the face of recent economic uncertainty, and few distressed assets have shown up on the market thus far.

As we move into 2023, Mumford Company expects a fairly dramatic increase in the amount of distressed assets on the market since interest rates have effectively doubled in the last six months. Hotels that were struggling with debt levels in the 3 – 4% range will not be able to effectively refinance in what likely will be a recessionary environment with 7 – 9% interest rates. Many hotel owners refinanced their properties over the last few years, with adjustable-rate mortgages taking advantage of the low interest rates. These loans will be difficult to underwrite moving forward, especially as valuations and demand fall over inflation/recession concerns in 2023 and beyond.

What recent transactions have you undertaken?

In Staunton, VA, in 2022, Mumford Company marketed two limited-service hotels at the end of their first franchise licence terms for sale. Both hotels were 20 years old and would require significant reinvestment to remain competitive in an otherwise solid Interstate/college town location. The owners of the properties, a well-known regional hotel developer, were looking to redeploy capital into other real estate projects and decided to sell. As we brought the hotels to market in late summer 2022, interest rates and inflation fears were both on the rise, and the continuation of the post-covid recovery in sales was in question. Mumford Company exposed the properties to a broad cross-section of regional and national buyers by employing a strong national advertising effort and targeted personal outreach. We successfully generated multiple offers on each asset, eventually settling on two of the strongest regional ownership groups to buy the properties and carry them into the future.

What market segments have performed best and worst?

Prior to the covid crisis, perhaps the worst single shock to the hotel market ever, the best-performing and fastest-growing market segments were the focused/limited service and extended stay hotel segments. That trend continues today. Transient travel for business and leisure has fully recovered to pre-covid levels, thus benefiting the limited-service hotel segment, especially in the drive-to-leisure markets. In recent years, the extended stay segment has exploded and continues to set occupancy and RevPAR records. As housing prices remain out of reach for many would-be homeowners, the budget segment of the extended stay market has become an excellent alternative for lower-income housing.

The worst-performing segments in our industry continue to be full-service hotels that rely on meetings and conventions to survive. Remote working and remote meetings using Zoom, Microsoft Teams, and other related technologies still delay the return of face-to-face interactions needed to help the segment recover.

What US regions have proved particularly popular for hotel sales recently?

The trend of relocating businesses and residences out of the major metro areas of the Northeast and Midwest into smaller, more affordable communities, particularly in the sunbelt, was already in place before the covid crisis hit. However, the pandemic exacerbated it dramatically. Remote working became the norm, and cities like Austin, Charleston, Nashville, Tampa, and Miami, which offered a more relaxed lifestyle, became incredibly popular. The hotel markets in those cities and others like them exploded as increased leisure and business travel quickly followed. We see buyer demand in these second-tier markets continuing to increase, especially once some relief arrives from current geo-political uncertainty and the fears of inflation in 2023 and even 2024. While higher interest rates will no doubt slow transactional activity, and new construction starts in the short term, it will soon regain steam as we find the bottom of this cycle and begin another growth cycle.

Do your clients tend to purchase assets with the intention of upgrading them or is it usually a purely transactional deal?

Mumford Company focuses primarily on the mid-market and economy sectors of the hospitality industry. Hotels sold in this space typically require some level of renovation to both meet franchise requirements and stay competitive. Franchisor-mandated improvements can be extensive and expensive especially given the recent supply chain issues and inflationary concerns. At the same time, these are a necessary part of a hotel’s life cycle. Buyers of hotels expect these required investments and build them into the acquisition “deal modelling” process. However, newer hotels are sold to take advantage of market conditions or to make equity available for alternative investments. These hotels may need little if any, reinvestment after closing and represent simply a portfolio addition for the buyers.

Which hotel chains do you feel have been especially acquisitory of late?

Major chains dominate the merger and acquisition landscape in the US. Hilton, Marriott, IHG, Hyatt, Wyndham, Choice, and Best Western are the most active players trading flags between brand families and bringing new brands into the market to focus on more specific micro-segments of the industry. 

Lifestyle brands have been especially popular for leisure and business travel, and owners of extended stay flags are looking for additional offerings to provide to this growing segment. We expect increased activity moving forward in both new brands/flag creation and acquisition of brands.

Have the recent volatile economic conditions impacted the hotel market?

Hotel performance remained strong as we ended 2022 in the US despite rising inflation and economic uncertainty. As we move into 2023, pundits are predicting a recession to materialise over the next 24-36 months before we begin another growth cycle. The underlying US economy is strong. However, employment remains high, providing hope that any recession will be short-lived and perhaps result in a ‘soft landing’.

Hotel valuations and demand for hotel acquisitions are driven by the availability and cost of acquisition financing, actual operating results, and projected future results. When property-level operating results start suffering to some degree, we anticipate hotel valuations will follow suit. As interest rates are now at the highest level since the early 1990s and we are facing some level of economic distress in the short and perhaps medium terms, our outlook for hotel valuations is turning downward for the next 12 months and perhaps a bit longer.

How do you see the US hotel market progressing over the coming years?

Mumford Company remains bullish on the medium and long-term outlook for hotel valuations and the hotel transaction market. Given a recovery from the current downturn, the underlying fundamentals and pent-up demand for travel for both leisure and business will push the market forward. Interest rates will likely become normalised in the range of 7-9%, and the volume of new development and acquisitions can increase dramatically.