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Is it better to buy, sell or develop?
April 17 2013

In a hotel environment filled with opportunity, investors must decide whether it’s best to buy, sell or build hotel assets.

  • “If you survived the downturn, it’s a good time to be a seller,” said Thomas Ives of CB Richard Ellis Hotels.
  • “A boring market with good fundamentals” is the place to develop, said John Keeling of Valencia Group.
  • Private equity funds are getting involved in hotel transactions.
By Ed Watkins
HNN contributor

Editor’s note: This is the first in a two-part series from the Real Estate & Development Advisory Council panel at The School of Hospitality Business at Michigan State University.

EAST LANSING, Michigan—The hotel industry is a land of opportunity, but the question today is whether it’s better to be a buyer, seller or developer of hotel assets. Participants during a recent panel at Michigan State University had varied opinions.

“Actually, we’re in a state of equilibrium, but things may be leaning just a little more to the sellers,” said Thomas Ives, senior VP of CB Richard Ellis Hotels. He and about 30 members of the Real Estate & Development Advisory Council at The School of Hospitality Business at Michigan State discussed hotel-industry investment topics during a roundtable held 5 April in East Lansing, Michigan.

“If you survived the downturn and still own a hotel, it’s a great time to be a seller because you can harvest the equity,” he said. 

Ives and other panelists agreed the decision might depend on location, and the probability of whether interest rates will rise in the future.

“When you look (to buy) full-service assets in top 25 markets, particularly (central business district) locations, values have already recovered to peak levels,” said Ryan Meliker, managing director and senior real estate investment trust analyst at  investment bank MLV. “Interest rates will be going up when you look to sell, so chances are you’re not going to see much capital appreciation. Maybe cash flows recover at the same rate as interest rates go up so you can sell at the same price, but you’re probably not seeing much appreciation. It makes sense to be a seller of these assets today.”

Buying opportunities could be best for select-service hotels in the suburbs or outside of the top 25 markets, Meliker said. The buying incentive is often based on the potential for cash-on-cash returns.

“And property values (for these assets) are still roughly 25% lower than they were in 2007 so you may even see capital appreciation on top of that,” he said.

Location is key to development
Location and chain scale make a difference in investment decisions for new hotel development, panelists said. While a company such as Concord Hospitality has mostly developed in secondary and tertiary markets in the past, it’s now branching out into other locations.

Grant Sabroff
Concord Hospitality


“Secondary and tertiary markets have been good for us over the years, but we’ve moved from tertiary to secondary and even a little bit into primary markets,” said Grant Sabroff, senior VP of business development for Concord, which has eight hotels under construction. “In secondary markets, you can build at a good cost, particularly in cities with good diversity of demand, such as from universities, medical centers and state governments. Find the right location and the right brand. That’s a winning formula.”

For John M. Keeling, executive VP of Valencia Group, a “boring market with good fundamentals” is the place to develop new hotels. The company develops and operates boutique hotels under the Hotel Valencia, Hotel Sorella and Lone Star Court names. Among several properties under development is one in suburban Washington, D.C.

“It’s in the no man’s land between Rockville (Maryland) and Bethesda (Maryland), so people ask me why we would build there,” said Valencia. “We will be part of a (large) mixed-use project, and while there will be a Marriott across the street, we’ll stand out in the crowd.”

Joel W. Hiser
Horwath HTL


Other panelists were bullish on center-city locations. Michael Kitchen, corporate director of acquisitions for Aparium Hotel Group, said downtown Detroit is among the locations in which his firm has interest. The company, which operates the Iron Horse Hotel in Milwaukee, plans to open a boutique hotel* in the former headquarters of the Detroit Fire Department. He said the company is using a variety of financing vehicles, including the EB-5 program, new market tax credits and historic tax credits, to make the project work.

“It’s not easy, and it’s not cheap in the pre-development phase to set up these incentives and credits but if you can, there’s an opportunity to deliver beyond-exceptional returns in these markets,” Kitchen said. “We’re building a 4-star asset for the price of a Courtyard (by Marriott).”

Where’s the money?
Of course, the key to any transaction or development project is the availability of money, which the panelists said they believe is readily available for the right projects, transactions and sponsors.

Angelo Stambules
Hunter Hotel Advisors


“We’re seeing regional banks getting more involved,” said Joel W. Hiser, principal and CEO of Horwath HTL. “We recently sold a property in Dallas and while the buyer was looking for a (Small Business Administration) loan in the Dallas area, he wound up with a deal from a bank in Atlanta. We’re starting to see the regional banks getting more aggressive again.”

Jason C. Rabidoux, director of real estate and business development for The Hotel Group, said in some cases regional and local banks are more competitive in placing loans than commercial mortgage-backed securities lenders. The firm recently sought CMBS funding on a property in a tertiary market, but the regional bank that had a current loan on the asset “saw an opportunity to step up its game and terms and offered a much more compelling story than the CMBS markets were able to do.”

As for transactions, private equity funds are getting more involved, said Angelo Stambules, senior VP of capital markets for Hunter Hotel Advisors.

“As the opportunities decline for these (funds) to buy bad debt or assets in distress, they’re beginning to look at putting money into new acquisitions from an equity perspective,” Stambules said. “They’re hoping for yields in the mid-to-upper teens and as high as 20%, but mid-teens is doable for some of these equity (firms.)”

No matter the financing vehicle employed, the basics of the lending relationship are still important, Sabroff said. All eight Concord properties under construction were financed by commercial or regional banks, but the key is “bringing it all together with the right brand, a strong sponsorship and a great location. If you have all that, you can get development financing to get a project done.”

*Correction, 17 April 2013: The original version of the story incorrectly stated the project will be an Iron Horse Hotel.

4/22/2013 10:21:00 AM
The largest problem with buying a hotel (vs building it yourself) is that you are then acquiring some-one else's BAD DESIGN. Most hotels in the US are put together by people who truly do not know what they are doing. Hence, they are filled with design flaws. By building ourselves, we get properly designed hotels. You cannot put a price on the operational anguish that these design flaws create.
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