Margaret Jackson | Mon, Feb 12, 2024, 9:43 AM PST

Hotels may be performing better than they were during the pandemic, but that’s not propelling sales of hospitality properties any higher.

Individual hotel sales in California plunged 45%, from 483 in 2022 to 265 in 2023, according to a CoStar report on Atlas Hospitality Group’s annual year-end California Hotels Survey. Dollar volume dropped 56.3% to $3.75 billion — the second-largest year-end drop in 15 years. In 2009, there was a 75% decline.

“If I’m operating today, and my hotel is operating well, I’m not going to sell in today’s market because I’m used to what the prices were 12 to 18 months ago,” Atlas Hospitality Group President Alan Reay told CoStar.

The cost of capital is what’s keeping sales stagnant. Higher interest rates can cause a property’s valuation to decline by millions of dollars.

The pandemic brought higher sale prices because of the combination of lower interest rates and a ton of built-up capital. Federal regulators kept the number of distressed properties down by allowing lenders to be more flexible. Stimulus dollars distributed to individuals and businesses also helped.

“There was a tremendous amount of tax money pummeled into the economy so that when hotels reopened, especially in resort areas, the numbers went off the charts,” Reay said.

California’s investment volume reflects the national trend in 2023, when sales sunk to $50.5 billion — the lowest volume since 2021, excluding 2020, according to commercial real estate firm JLL’s Global Hotel Investment Outlook report. The Americas and Europe, the Middle East and Africa (EMEA) saw the largest declines relative to historical averages, down 29% and 43%, respectively.

“Widespread capital market dislocation, particularly high interest rates from most of the world’s central banking institutions, resulted in historically low portfolio transactions and declines in average deal size,” the JLL report states.

Although 1,404 trades took place in 2023 — the second-most in history — the average deal size dropped to a historic low of $36 million. Single-asset trades accounted for 79% of global hotel investment volume — their highest portion in history — as portfolio transactions declined 59% to $10.7 billion.

“Investors struggled to finance high-dollar deals driven by volatile global debt markets stemming from hawkish monetary tightening policies,” according to the JLL report.

First-time hotel buyers accounted for 19% of the year’s volume as hotels have become a preferred asset class for some institutional investors. The hospitality sector’s robust operating performance and the industry’s built-in inflation hedge mean the trend is likely to continue, with high-net-worth people and family offices likely to invest heavily in hotels.