IREFAC: No cycle-ender in sight
IREFAC: No cycle-ender in sight
24 JULY 2017 7:27 AM

Members of the Industry Real Estate Financing Advisory Council said they understand why people are concerned about the length of the current cycle, but there’s no single thing they can point to that might end it.

BOSTON—Many lodging industry insiders are worried about the end of the current cycle, but members of the Industry Real Estate Financing Advisory Council said they don’t see any particular dark cloud on the horizon that might cause it.

Speaking at a panel during the Americas Lodging Investment Summit summer update in Boston, J. Allen Smith, president and CEO of Four Seasons Hotels and Resorts, said he simply can’t pick out what that harbinger of the end might be.

“We focus on things that could derail (the cycle) that are visible, and I don’t see any,” he said. “I know the longer it goes, the more uncomfortable people get, but what’s that dark cloud on the horizon? … We can identify uncertainties, but those things that are a catalyst, I don’t see it right now.”

He noted, though, that “few saw 2007 coming,” so a cycle-ending mega event might not be obvious beforehand to everyone affected by it.

Moderator Neil Shah, COO and president of Hersha Hospitality Trust, noted one metric that points to the prolonged but modest growth of the current cycle and economic recovery.

Looking at where hotel industry metrics peaked in past cycles, he said, “In the ’90s and 2000s, it was 50% to 70% over the prior peak. Today we’re only 15% above the prior peak, which makes me think we have more room to run.”

Christopher Jordan, EVP of Wells Fargo Commercial Real Estate, said he does see some things that give him pause going forward.

“I can see a combination of a (Federal Reserve) tightening cycle and nothing from Washington in terms of pro-growth initiatives that could stall the economy,” he said, noting he doesn’t see the “systemic excesses” that led to the last recession.

Jordan agreed that growth following that recession has been remarkably muted.

“The last eight years have been remarkable,” he said. “We’ve had an average growth rate below 2%. That’s almost unprecedented in modern American times of having that prolonged period of subpar growth, and it came amid unprecedented monetary policy stimulus.”

The state of debt
One of the primary concerns is a spike in supply numbers, particularly in key markets around the U.S. But W. Michael Murphy, head of lodging and leisure capital at First Fidelity Companies, said lenders seem to be keeping that in check at least somewhat.

“Developers are never concerned (about supply),” he said. “I share (Shah’s) bias towards the optimistic end, and so do most developers. … They’re not generally dissuaded by market conditions. So, it’s more about capital availability, and today (getting construction financing) is a very difficult task. Some guys continue to sign and get construction financing today, just not at the levels they could have a few years ago. And somebody without (regional bank) relationships, and seeking the benefits of an intermediary, can’t always get a contribution.”

Shah said it seems like debt availability and pricing outside of construction lending is getting more favorable for borrowers, noting that things are “getting really attractive.”

But Murphy said that can be overstated. “It is (attractive), but you’re still paying a point to leave (your current financing),” he said. “People are talking about that as well, so the cost to capital isn’t that nominal spread everyone gets slathered up over.”

Possibility of disruption
Smith said “loses more sleep about” the possibility of new players, particularly large tech companies, coming into the hotel space and causing large-scale disruption in a way that hoteliers just don’t see coming right now.

He said the industry needs to learn a lesson from the rapid decline of traditional retailers. He believes hoteliers would also be foolish to ignore the players currently causing disruption in lodging.

“When I started this job about four years ago, people were saying to me ‘you’re really lucky you don’t have to worry about Airbnb,’” Smith said. “I thought I had to worry about everything, and now I do. Airbnb is now a threat to us in certain segments of our business. (I’m worried about) the speed in which that’s all happening and trying to figure out how to react to it.”

Jordan said one thing he believes could have a lasting, negative impact on the hotel industry and travel in general is the current rash of travel policy that creates a negative perception about how welcoming the U.S. is to foreign travelers. He said those concerns now supersede worries about the strength of the U.S. dollar in his mind, particularly because the dollar has weakened recently.

“I think the travel restriction issue could potentially be profound,” he said.

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