Brexit: The grandfather of all black swans
Brexit: The grandfather of all black swans
28 JUNE 2016 8:16 AM

The outcome of last week’s Brexit referendum will signal a further fracturing of Europe, so hoteliers should be ready to hunker down. 

The grandfather of all my black swans has landed.

This is exactly what I have referred to for several years as the black swan event. All of those who mocked me about my black swans—welcome to the world of black swans.

This is the really big one, and its ramifications for the U.S. hotel industry are major. Travelers from Europe and the U.K. will be few and far between for several years. New York and places like Boston, Disneyland and other places that would normally see big influxes of tourists from Europe will see a decline. The capital markets will be in turmoil for a long period.

The good news is interest rates will stay very low for several years as things remain volatile in the capital markets and economy. However, lenders will be ultra-cautious for the next few months as risk off will be the policy and regulators will enforce it. CMBS could be very disrupted as bond buyers will be very scarce for CMBS paper, since it is considered risky. There will be no European market for CMBS for awhile.

This will materially complicate anyone with a maturity over the next two years. Life just became far more problematic for you. People in the financing space will need to have lots of connections in the alternative lender space, but for borrowers, loans just became more expensive. Cap rates just went up. Equity will be much more problematic to obtain.

Last week I wrote that you missed your chance if you did not sell in 2015. Now you really missed it. Transaction volume will decline further for a long period. Brokers will struggle this year and maybe next year to sustain their business levels. It may be survival mode again just like 2009. If you are a seller, adjust your dream down now to reality. You will not get what you fantasized about when you sell.

What has happened is not just about Brexit, but rather the start of a revolution in the world politically. This really is the big event. People across the world are fed up with the establishment. They have had it with a faceless group of government elites thinking they should tell everyone what to say, do and think. Political correctness has no blowback on them. It is why Donald Trump and Bernie Sanders were so successful. Brexit and the U.S. election this year are the exact same revolution of the masses rising up against the establishment that has led us to stagnation, excessive regulation and political correctness run amok. It is why I believe Trump will win if he can control his ego and his mouth.

Europe will come apart over time. Spain, the Netherlands, Denmark and maybe even Italy will be rumbling about a referendum. Investment in Europe is dead for a long time. Anyone with assets in Europe or euro denominated is toast. The disruption has just begun. We are just at the start of the reordering of Europe in a major way, and there is no way to predict the outcome. These are very dangerous times now and nobody knows how this all plays out. It will be historic and unsettling, and Obama is the wrong leader to have at a time like this.

Now more than ever, hunker down. Forget all the rosy forecasts about revenue per available room and golden ages. Not happening. With the markets in turmoil, retirees will hunker down. People are not going to be rushing to take big vacations. Business will now clamp down even more on travel costs. You need to be in survival mode now until we know where all this is headed. 2016 and 2017 could be very unpleasant. Occupancy is already down through May, and from here it is likely to stay down. Average daily rate is barely up and could go flat or down now. We simply don’t yet know all the ramifications of the European Brexit crisis.

The black swans have taken over, and the fog has rolled in, so we cannot see where we are headed from here.

Joel Ross is principal of Citadel Realty Advisors, successor to Ross Properties, the investment banking and real estate financing firm he launched in 1981. A Wharton School graduate, Ross began his career on Wall Street as an investment banker in 1965. A pioneer in commercial mortgage-backed securities, Ross, along with Lexington Mortgage, and in conjunction with Nomura, effectively reopened Wall Street to the hotel industry. Ross also was a founder of Market Street Investors, a brownfield land development company. A member of Urban Land Institute, Ross conceived and co-authored with PricewaterhouseCoopers The Hotel Mortgage Performance Report. Ross served two tours in Vietnam with the U.S. Navy.

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1 Comment

  • Varghese Paulose June 28, 2016 10:41 AM Reply

    What are these? Predictions? Who are you? Nostradamus?
    Are any of these ramifications that you have rambled on about based on any sort of data that normal people without political bias can make any sense of? "Europe will come apart in time." When do you reckon that is going to happen? Tomorrow? In 5 years time? The next century?
    "The capital markets will be in turmoil for a long period." How can you make a prediction like that with a straight face? I particularly liked the ending. "We simply don’t yet know all the ramifications of the European Brexit crisis." But that obviously did not stop you from giving a whole spiel like you knew exactly what was going to happen and when.
    I would really appreciate if you could take just one prediction from the entire lot and back it up with some sort of data, without making personal judgments, coloring it with your own bias and passing it off as the the truth. Would you?

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