Pricing could slow 2016 hotel transactions
04 FEBRUARY 2016 8:21 AM
Members of the Lodging Industry Investment Council said a difference in expected prices between hotel sellers and buyers could have a negative impact on the number of deals in 2016.
LOS ANGELES—There’s a difference of opinion between industry observers and Wall Street analysts on where the hotel industry is in its cycle, and that disconnect on the industry’s fate could ultimately have an effect on transaction volume, according to members of the Lodging Industry Investment Council.
Speaking at the council’s meeting held in conjunction with the 2016 Americas Lodging Investment Summit, sources said pricing expectations could be a sticking point.
Mike Cahill, CEO and founder of Hospitality Real Estate Counselors, said that keeps him up at night as a broker.
“Selectiveness is the key word for 2016,” Cahill said. “As a broker, I don’t like that. I like wild exuberance.”
Steve Kisielica, principal at Lodging Capital Partners, said he expects the exit of real estate investment trusts as buyers will also affect pricing dynamics and ultimately transaction volume.
“A massive segment of the market that had been supporting values is not buying,” Kisielica said. “That’s got to affect pricing. And if a seller has a good property … why take a 25% haircut in value? That will lead to a stagnation in volume. But this period won’t last forever.”
Sean Hennessey, CEO of Lodging Advisors, agreed that sellers don’t have the motivation to lower prices to meet buyers’ expectations yet.
“Capitalization is locked in for sellers,” Hennessey said. “They don’t have to recognize market trends right away until the mortgage comes due or so forth. From an investment point of view, they have to clear the market every day.”
Kisielica said concerns of a quick downturn might make it easier for many companies, not just REITs, to take a step back from making large investments in hotels simply out of fear.
“Doing a bad deal is so much worse than doing nothing,” he said.
Williams Reynolds Jr., senior managing director at MCS Capital, said a slowdown in transactions also could be attributed partially to funds and institutional investors who don’t focus primarily on the hotel industry being scared off by Wall Street perceptions.
“A lot of these guys have pulled back because they’re not hotel investors per se,” Reynolds said. “That’s a huge telltale (sign) for me. It doesn’t mean they’re totally negative or gone, but they’ll be really cautious and won’t get traction for a while. … This is a year where the investor world has said, ‘We’re here, so our investment goals can’t be met anymore.’”
Reynolds said there are already some anecdotal signs this dynamic could be playing out. He said his company has ventured to a “high-performing property” but gotten no interest from six companies he thinks would have been eager buyers even a year ago.
Jim Butler, chairman of the global hospitality group at the Jeffer Mangels Butler & Mitchell law firm, said any potential slowdown hasn’t shown up at his business, though.
“The legal profession is probably the lagging indicator for what’s happening in the industry,” Butler said. “And right now, as a lagging indicator, we’re very busy.”
Is it time to become less selective?
With varying price expectations, hoteliers poised to be buyers might have a more difficult time finding properties that fit their investment parameters within their price range. But sources warned that doesn’t mean it’s time to throw caution to the wind and chase any deal available.
Reynolds said instead of widening their scope, potential buyers should just focus on what they can find that still works, even if that means doing fewer deals than originally planned. He said there will be opportunities for everyone on the market, but investors need to careful not to do deals to meet some sort of quota.
“The good news is I don’t think we’ll go backwards in terms of travel,” Reynolds said. “Global input into the U.S. will go up even more. … But we don’t want to just have bragging rights about having 100 hotels.”
A year of opportunity?
Even if transaction volume dips in 2016, sources said opportunities exist this year for companies that are properly positioned and ready to pounce.
“I’m excited,” Kisielica said. “This is a private equity company’s time to shine if they can get the product. For us and everybody else, I’d say to be patient.”
And Cahill said there are still several market factors that make this a good market for transactions, even if the pace slows somewhat.
“2016 is still a great time for people to buy hotels,” he said. “If you’re in private equity, you don’t have competition from the REITs, and interest rates are still at an all-time low. It’s still a good time to buy.”
And while there’s much discussion of whether the industry is approaching the downward portion of the cycle, Butler said even if the worst predictions are true, that shouldn’t be enough for shrewd investors to take themselves out of the market.
“Down cycles create opportunity,” he said.