BOSTON—The hotel industry is moving into a new part of the recovery cycle, panelists said during a general session last week at the inaugural Hotel Equity and Lender Perspectives conference.
“It’s all about rate at this part of the cycle,” said Jim Luchars, chief investment officer at Stonebridge Companies LLC. “The winners and losers of this cycle will be the ones where you are seeing a real rate push.”
Russ Urban, senior VP of acquisitions and development at HEI Hotels and Resorts, said hotel companies should pay particular attention to the transient portion of their rate mix.
“A lot of (revenue-per-available-room growth) will come from not only rates going up but an effective remixing of business,” he said. “It’s time for us all to push that transient rate as hard as we can.”
The coastal markets in the United States have been the top performing markets, the panelists said. Marty Reid, executive VP of development and acquisitions at Interstate Hotels & Resorts, said full- and select-service hotels have seen rate growth of late.
Asked by moderator Bob Foley, chief talent officer at Pyramid Hotel Group LLC, to name a specific top-performing market, Luchars went with New York. He said the city has the potential to absorb all the supply directed at it and “blow by prior peak.”
As for market laggards, Luchars said real-estate slowdowns in Florida and Phoenix will hinder the hotel sector in those locations.
However, Luchars said such larger macroeconomic issues as Europe’s debt crisis could stop the hotel sector’s growth in gateway markets, though he added he hasn’t noticed any effect in New York as yet.
Development prospects
The stalled hotel development scene has created a good environment for hotels, said Tom Varley, senior VP at Ocean Properties Limited.
“What makes us most excited is the lack of supply,” he said. “It’s very difficult to get construction financing.”
He added, “There are a couple projects we’re kicking dirt around on, but we haven’t put the shovel in the ground.”
Smaller projects, those with fewer than 150 rooms, are easier to get off the ground because financing can be had from smaller, local banks, Varley said. “On large projects that require a lot of debt,” he said, “you won’t get a lot of support.”
Financing outlook
Luchars said Stonebridge is a “relationship borrower,” adding a lot of people in the industry are realizing that relationship borrowing is a good way to go.
He said commercial, mortgage-backed securities debt during the previous up cycle was cheaply priced and yielded high proceeds, but there was no relationship between borrower and lender, which is so important today.
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| Russ Urban, senior VP of acquisitions and development at HEI Hotels and Resorts, said hotel companies should pay particular attention to the transient portion of their rate mix. |
Urban said financing terms vary based on the borrower. “If you’re in the major markets and you’re a good borrower with a relationship with the lender, you can get very attractive yields,” he said.
Yields can be between 9.5% and 12%, he said, depending on what is being financed and if the project is still in the ramp-up phase.
“Just about everyone out there is starved for capital,” Urban said.
Construction financing is still difficult to obtain, the panelists said. “You need to be an established developer to get a construction loan,” Luchars said.
The construction loans that are being made today, he said, are low leverage with recourse. “With the exception of Manhattan, there are very few construction projects getting financed today.”
For those projects that need to finalize a property improvement plan, Varley said the brands are flexible on some of their requirements.
“Most of the brands will work with you on the last 20% of items (on a PIP list),” he said. “Most of the brands have been willing to work with us on some of the PIPs we didn’t think added value.”
Transactions
On the topic of hotel acquisitions, Luchars noted that private equity firms are showing “a lot of pent-up demand” for deals.
“One of the challenges is they all want the same deal,” he said. A lot of the transactions taking place are concentrated in the same 10 to 15 coastal gateway markets, he added.
As far as capitalization rates are concerned, the panelists said those numbers are all over the map.
In primary markets, cap rates seem to be in the 8.5% to 10%-plus range for select-service properties, for instance, Luchars said. Other panelists said they have seen cap rates low and high.
Other observations
The panelists touched briefly on several other topics during the session:
OTAs: Discussing online travel agencies, Varley said the brand’s response in launching Roomkey.com is a “step in the right direction.”
“The OTAs got way ahead of them,” he said. Shifting booking back to brand.com will add a “tremendous amount on the bottom line.”
Social media: Varley took a view of social media that stands in contrast to what many hoteliers and consultants have said on the subject. “We find social media a little overrated,” he said. A good website, he argued, will bring traffic to a hotel’s website just as social media outlets do.
Automated check-in: Five years ago, there was reluctance in the industry to automate the check-in process, Urban said. But today, “everybody wants automation … If you need to talk to someone during the check-in, there’s always someone to talk to.”
Also on the subject of hotel technology, Varley said the brands need to simplify their efforts. Focus on providing strong Wi-Fi, he said.
Phones in rooms: Hotels should do away with telephones in rooms, Urban said. Replace them with two simple buttons: one that can be pressed to summon security, and one to be pressed if there is a fire.
Going green: If an hotelier can save money and still be energy efficient, then efforts should be made for a property to go green, Varley said. However, he added the jury’s still out on whether guests or groups will specifically book a hotel that goes green.
