An increasingly difficult landscape for financing and murky projections for future performance has made investing in hotels more difficult than in 2015.
NEW YORK CITY—Investing in hotel real estate seems to be more complicated and difficult than it was a year ago, but members of an industry think tank said there are still opportunities to be found.
Members of the Lodging Industry Investment Council, which held a meeting in conjunction with the NYU International Hospitality Industry Investment Conference, said the investment environment has shifted noticeably since the start of 2016 with financing now harder to come by and some major markets like New York City facing significant challenges.
Steven Angel, principal at Fulcrum Hospitality, said borrowing has become more difficult in 2016.
“I think the availability of debt has changed meaningfully,” Angel said. “Underwriting standards have tightened. They’re going back as far as 2008-2009 income for diligence on a deal. The buying environment has become much more challenging.”
Sean Hennessey, CEO of Lodging Advisors and LIIC co-chairman, said general uncertainty around the industry has slowed down deals despite strong performance metrics.
“Demand is as high as ever, but expectations of growth have really dried up because of fears over the economy and new supply,” he said. “People pulled back without a tremendous downturn.”
Jan Kuehnemann, VP of the capital transactions group at FelCor Lodging Trust, said there are still people looking to buy, just not as many.
“We haven’t seen any real reduction in pricing, but the amount of people who get to that number is less,” Kuehnemann said. “But they’re still getting there.”
Who is buying?
Lodging real estate investment trusts aren’t active buyers, Kuehnemann said, so the pool of potential suitors for a property are now made up largely of private equity, high-asset-value individuals and families, and international capital, along with people who are looking to pick up assets in their individual markets.
“Local players make up a lot of buyers right now,” he said. “That makes sense, because they understand the market and aren’t disturbed by the macroeconomics.”
Alan Tantleff, senior managing director for FTI Consulting, said lodging REITs have transitioned to being “committed to selling” and Kuehnemann said there are a few ways they end up using that capital.
He said the soon-to-be-formed Park Hotels & Resorts, which is the REIT spinning off Hilton Worldwide Holdings’ owned assets, is expected to be the exception to that trend, as executives with that company have stated they expect to enter the market looking to buy.
Chinese investors have been among the most attention-grabbing pools of foreign capital thus far in 2016, but Clyde Guinn, principal at Lodging Advisory Services, said China’s regulations could threaten that.
“One thing that is uncertain is what will the Chinese government let real estate players do,” he said. “What will HNG and Anbang get to do?”
Where some see challenge, others are likely to see opportunity, said Jim Butler, founding partner with Jeffer, Mangels, Butler & Mitchell and LIIC co-chairman.
“This is a glass half-full or half-empty issue,” he said. “The REITs have gone very quiet. If your financing is based on stock, you probably have one view of the world, but the other mortals that have basically been squeezed out of the market the last few years think this is wonderful. They’re able to find hotels for sale that make sense and aren’t bid up by REITs.”
Mike Cahill, CEO of Hospitality Real Estate Counselors and LIIC co-chairman, said things are not as good as they once were in the transactions market, but they are still good in the grand scheme.
“Debt is tighter but still relatively available at decent terms,” he said. “Equity is still out there, but there are more shoppers than buyers.”
When LIIC last met in January during the Americas Lodging Investment Summit, one of the recurring themes was the bid-ask spread slowing down the pace of hotel transactions because sellers sought midcycle prices while buyers sought end-of-cycle pricing. LIIC members said that gap seems to be getting smaller.
“Things are still relatively active, and what we’re finding in the first half of 2016 is a new pricing reset,” Cahill said.