Lodging Industry Investment Council members express optimism, though somewhat reserved, about what opportunity zones will bring to the hotel industry, and hoteliers talk on video about the big outside influences on the hotel industry.
NEW YORK—Hotel developers see opportunity in opportunity zones, but caution the real estate designation is not a “panacea” to make every project pencil, according to members of the Lodging Industry Investment Council.
Talking to Hotel News Now at the LIIC meeting during the 2019 NYU International Hospitality Industry Investment Conference, owners and developers said there is plenty of reason to feel optimistic about how recent tax law changes incentivize development in different areas.
LIIC members also shared their thoughts on the biggest outside influences on the hotel industry and their effects. Watch the video below for that commentary.
Guy Maisnik, partner and vice chair of the global hospitality group for Jeffer, Mangels, Butler & Mitchell, said interest in opportunity zones has spurred a new wave of investment in hotel projects and real estate broadly.
“We’ve gotten a number of calls because investors want to protect their stock market gains and move into assets with long-term growth,” he said.
Opportunity zones were expanded in the federal government’s recent tax changes and allow for deferral of capital gains and the exclusion taxes on new capital gains created through real estate projects. A total of 12% of census tracts in the U.S. are now designated as opportunity zones.
Opportunity zones were created to spur investment in low-income and rural areas, but there are some surprising tracts that qualify for the tax benefits, said Mary Beth Cutshall, CDO for HVMG. “There are some interesting slivers in cities that are sandwiched between successful submarkets,” she said.
She cited as an example a project her company is doing in an up-and-coming neighborhood of Atlanta for a Motto by Hilton property with commercial development and townhouses.
But not all opportunity zones are as primed for success, Cutshall said, noting any project would need to be “the right piece (of land) at the right time” with nearby demand generators.
“Maybe about 20% of opportunity zones are viable hotel areas,” she said. “You have to find them, because they’re not the majority.”
Steve Kisielica, principal and chief investment officer for Lodging Capital Partners, said the growth of development in opportunity zones opens up possibilities for operators as well as developers, who are looking for “hotel partners with expertise” in those areas, he said.
David Duncan, president of First Hospitality, said the sophistication of some of the investors rushing to opportunity zones remains to be seen, and it’s unclear if they’re truly poised to succeed in a complicated real estate sector like hotels.
“There’s relatively cheap capital being raised, but the question is how they deploy it,” he said. Investors need “qualified hotel experience on the team.”
Maisnik said the investors approaching his firm do seem to be relatively sophisticated with “good quality hotel people” working on their projects, but that doesn’t mean there won’t be supply issues eventually.
“I may be jaded but in my experience … if there’s room for a hotel and capital to build it, there will be a developer there to build it and worry about (supply) later,” he said.
Duncan, who said his company is working on an opportunity zone project in Dayton, Ohio, and another in North Chicago, said the supply concern arises in areas where a project might have been attractive before but now faces additional competition.
Jeff Dallas, CDO of StepStone Hospitality, said he understands the over-development concerns, but they haven’t been realized as of yet.
“We haven’t seen the tail wagging the dog, yet,” he said. “So far the dog is still there.”
Kate Henriksen, co-chief investment officer for RLJ Lodging Trust, said it’s a matter of if, not when.
“With that much demand (from investors), it’s probably inevitable at some point,” she said.
Dallas said the use of opportunity zones is predominantly around new-build projects, noting conversions are possible but “harder to pencil out” because not all improvements in a conversion project qualify for the tax benefits.
“It’s not a panacea,” he said. “It’s a nice way for people to utilize their 1031 (exchange) money, but you’ve really got to do your homework on which (projects) to work on.”