SAN DIEGO—With the economy on the rebound and lenders tripping over each other to finance credit-worthy projects, hoteliers are finding themselves surrounded by opportunity, several speakers said at this week’s Crittenden National Real Estate Conference in San Diego.
Perhaps nowhere are the options as promising as in repurposing dated urban properties into hotels.
“The fact of the matter is that adaptive reuse makes a lot of sense,” said David Teitelbaum, president of Teitelbaum Developers and Anna Maria Island Resorts in Bradenton Beach, Florida.
Teitelbaum outlined several reuse projects he led in New York. Among them was 31 Union Square West, which Teitelbaum said he bought as an underutilized office building in 1974 for $300,000. Now housing luxury apartments, the historic property was recently assessed at $24 million.
Robert Kline, Principal and CEO and principal at real estate, financial and land development advisory group RW Kline Companies, said investors are looking favorably at this niche “because they feel the hospitality sector has got a little bit more of a safe haven to them at this point in time.”
Converting office buildings to multifamily projects such as condos and lofts is past its peak, Kline said. “That is dying off extremely fast because multifamily in most cases is overbought or at least certainly at its high peak in the market,” he said.
While opportunities exist, so do dangers.
“As you go around the country, you’re going to see adaptive reuse of historic buildings,” said Michael Cahill, CEO and founder of Hospitality Real Estate Counselors. “Anywhere from train stations to bank buildings to post offices, you’ll see a lot of these that have been done successfully into hotels. And when they work, they’re a very beautiful thing.
“When you create an adaptive reuse of a building into a hotel, not only is it used by the local population in terms of the functional space, the meeting space and the restaurants, it really is showing your city off to the outside world.”
Cahill cautioned that such projects “are not for the faint of heart.” They are extremely complicated, he said, because the structures are so old that renovations could mean gutting the property to make it work for a hotel.
“A lot of experienced developers get in trouble because they underestimate costs,” Cahill said. “They fail to do proper engineering and environmental inspections. You really need to do your homework. And then you really need to have a fantastic architect and engineering firm.”
“Remember that, at the end of the day, the consumer may visit your hotel because it’s cool and old, but if you want them to stay there, it’s got to be functional,” he said. “You have to have a great room product, you have to have great bathrooms. You have to have good flow.”
Even when historic properties are bought at a bargain, developers can end up spending more money renovating it and turning the site into a hotel than the building is worth. Because of that, hoteliers should seek to secure various tax breaks.
The bottom line for success? “You need to take a step back and say, listen, there’s got to be a need for this hotel,” Cahill said. “There’s got to be commercial travelers that need to stay there, leisure travelers need to go there, business travelers need to stay there. You can’t assume that if you create this great building, people will just come.”
Financing loosening up
Financing is not nearly the problem it was just a couple years ago, experts said. Several lenders noted how financing has become more readily available in recent months.
“It’s rare that I’ll see a deal that can’t get financing anywhere,” said Xavier Sheid, executive director of real estate finance at CIBC World Markets. “This is a great time for borrowers to be in the market.”
Gary Bechtel, chief lending officer at Business Partners LLC, said: “Banks are getting back in the business because their balance sheets are much better than they were a couple years ago.”
“In this environment, with so many different capital sources, a lot of times you have somebody who’s putting together a deal then looking for equity partners, they kind of feel an obligation to use a broker to make sure they’re canvassing the market and getting the absolute best deal for their partners and for themselves,” said John Wickenhiser, senior VP and manager of Commercial Real Estate Institutional & Metro Markets Group for Wells Fargo.
Some wondered if it isn’t time to start loosening up regulations. Among them was Malcolm Johnson, senior VP of real estate banking for J.P. Morgan. He called for “a more tempered regulatory environment.”
Lenders, Johnson said, “have to deal with more compliance issues today than in any point in the past. Truthfully, my dad used to say that abuse leads to restrictions, so there’s a reason why today’s regulatory environment is so strict. We kind of asked for it and now we’re taking our medicine. But to the extent that it’s going to temper our ability to do business with good clients, that could be a real problem. I think that’s something we all need to focus on and lobby our elected officials and Washington about.”
Some wondered if lenders are changing their expectations and standards.
“I think we all recognize today versus a couple months ago that simple supply and demand has lenders perhaps taking more risk or lowering return expectations or some form of both if we want to do business,” said Larry Grantham, managing director for Karlin Real Estate. “It’s a borrower’s market.”
Still, some potential clients are doing a bad job of selling their projects, sources said.
“You need to be able to communicate in the time of an elevator ride from the first floor to the ninth floor why we should do the deal,” said Jonathan Schurgin, managing director for Cantor Commercial Real Estate.
Grantham agreed. “I was looking at a package last night when I was flying in at 10 p.m. from San Francisco. I read a 20- to 30-page book, and I didn’t understand what the hell the borrower wanted.”
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