Supply growth concern appears on LIIC’s radar
Supply growth concern appears on LIIC’s radar
03 NOVEMBER 2014 8:29 AM
A discussion among members of the Lodging Industry Investment Council reveals some initial alarm about supply growth for the U.S. hotel industry, but there’s no full-scale panic for the foreseeable future.
PHOENIX—Members of the Lodging Industry Investment Council meeting last month during The Lodging Conference expressed some slight concern over the hotel industry’s development pipeline, while at the same time learning that a tried-and-true development vehicle is making a strong comeback.
When Vail Brown, VP of global business development & marketing for STR, told the group that select-service hotels were the most popular form of development in a pipeline that includes more than 390,000 rooms in the United States, the attendees said they realized that there is a potential problem on the horizon.  STR, the parent company of Hotel News Now, reports there are 108,000 hotel rooms under construction in the U.S., which is 38% more than were under construction in August 2013.
“It’s undeniable (that supply is a growing issue),” said Doug Dreher, president & CEO of The Hotel Group, an Edmonds, Washington-based company that owns and/or manages 35 properties and is celebrating its 30th anniversary.
Dreher’s company has four hotels under construction, including one at the Honolulu International Airport, and four in other phases of the development pipeline. It hasn’t been an easy road for development projects, he said.
“One of them we had been working for three and a half years, but it flipped this year,” Dreher said.
David Loeb, senior research analyst and managing director for Robert W. Baird & Company, was just as direct.
“We certainly are watching supply; we’re concerned about supply,” he said, citing various markets as examples of the different ways new hotel supply is being absorbed. “Denver has pretty well absorbed, but Chicago is crazy. But as much as we’re worried about supply, I think it comes on more slowly.”
“New supply is not an issue yet; it’s a matter of when,” Brown said.
Loeb said one trend he sees on the supply side is a longer construction cycle because the size of hotels is getting bigger.
“We’re seeing a broadening of demand into more and more smaller markets,” Loeb said. “That says a lot about the appeal of select service.”
Meanwhile, another hotel sector beyond select service is gaining momentum. Guy Maisnik, partner and vice chair of the global hospitality group at Jeffer Mangels Butler & Mitchell, said nearly every hotel deal the firm is involved in includes a Chinese investment in condo-hotels through EB-5 visa funds or private capital.
“With the new rules from the (Securities & Exchange Commission), condo hotels are back,” Maisnik said.
The key to the SEC ruling allows a developer to market projects to all potential investors, according to Maisnik. Previously, developers could only market projects to accredited investors. While deals can only be closed with accredited investors, the new SEC rules provide a caveat not previously available.
“You can pool money; you can require people to be in the rental pool,” Maisnik said. “The reason it is important is the Chinese investor. … They all want a piece of the investment. To me it’s a new twist, and almost every deal that comes through with an EB-5 component has this element.
“It’s an exciting area for those raising capital,” he added.
Raising capital is the elusive golden ticket for many hotel developers, LIIC members said.
“We’re seeing a lot of interest for equity,” said Bill Sipple, executive managing director for Denver-based HVS Capital Corporation. “A lot of it is in the slim market of development equity. We’re not seeing a lot of it, but we have a lot of requests for it. It’s the unicorn at the end of the rainbow with leprechaun on top of it.”
Frank Anderson, president of New York-based Anderson Hospitality Consultants, said he is having more difficulty finding funds for the top half of the capital stack for hotel deals.
“There seems to be pressing need to find equity for construction loans,” Anderson said.
“We’re seeing a lot of people short on equity on average deals,” Sipple said.
Anderson said non-recourse financing remains expensive for borrowers.
“So many of my customers, who are involved in top projects in a market place, where they used to get construction financing at 300-325 (basis points) over (LIBOR), forget it. Some is available for 750, 800 over,” he said.
Mike Cahill, president & founder of Hospitality Real Estate Counselors, said his firm is “getting a lot of requests for construction financing now. A lot of people who were buying from us (during the past few years) are now interested in developing.”
With more national lenders coming onto the scene, financing is becoming more available, but the members agreed securing funding usually boils down to having a relationship with a local or regional bank.
Jay Burnett, VP of real estate for Greenville, South Carolina-based JHM Hotels, said the company is selling five properties, refinancing the same number and is buying one with the intent to acquire more. It owns 41 hotels.
“We seem to shop a lot of stuff (to national lenders), then end up with a lot deals with relationship banks,” Burnett said.

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