Headwinds, CMBS woes revive talk of distressed hotels
Headwinds, CMBS woes revive talk of distressed hotels
29 APRIL 2016 8:32 AM

The revived Fishing for Solutions conference reveals some concerns for special servicers, but maintains that there’s still upside left in the current economic cycle.

DALLAS—Depressed energy markets and the stalled commercial mortgage-backed securities platform are causing concern for the hotel industry, but speakers at Thursday’s Fishing for Solutions 2016 event said those issues aren’t enough to warrant the doomsday mentality that is enveloping some corners of the hotel industry.

“We all know something’s coming,” said Steve Van, president and CEO of Prism Hotels & Resorts and founder of the conference. “The physics of entropy demand it will come down at some point. We can do the best that we can while trying to prepare to be ready when something does happen.”

But there appears to be some unrest lurking: The conference itself took two years off because there was such little involvement by special servicers during this economic cycle’s peak years. The event is geared toward special servicers who deal with distressed hotels.

“Energy markets are a good test case,” said Adam Lair, senior partner of HVS. “At the end of the day, we’re looking for interplay between supply and demand, and nowhere in the hotel business is it more volatile than in these energy markets.”

The CMBS market was the most common discussion point throughout the day. While that financing vehicle was hit hard by the Great Recession, it bounced back with a flurry of activity but has seemingly backed off as the current cycle evolved, speakers said.

Michael O’Hanlon, managing director at Strategic Asset Services, said there’s a “dislocation” in CMBS as providers are having trouble writing loans and selling some of them.

Brad Sinclair, co-president of Hotel Assets Group, called the CMBS market confused.

“The CMBS world has dried up for the time being,” he said.

“A lot of originators have full balance sheets and can’t originate anymore,” Van added.

But there could be a method to the madness, according to Joe Corcoran, VP-Southwest of The Plasencia Group.

“One of the reasons they’ve tightened up is to keep their powder dry to get ready for the refinancing that’s going to be needed,” Corcoran said.

Property improvement plans also weaved their way through most of the event’s nine sessions. Special servicers said they find PIPs particularly disturbing as they are dealing with them while trying to salvage the property from financial chaos.

“We don’t want to advance huge PIPs,” said Barry Davis, COO of C-III Asset Management. “We’ll work with the brands, stretch the PIPs, do what is necessary, then put it up for sale. … We’re looking to stabilize the property, get it to market and let somebody else take care of it.”

O’Hanlon agreed that working with brands to stretch the PIP is a key strategy employed by servicers.

“Not too many servicers are putting $10 million into a property—we’re not developers,” he said.

Brian Quinn, SVP and chief franchise officer of Red Lion Hotels Corporation, said there’s a good reason for the PIP parade being routed through the industry since brands delayed PIP requirements during the downturn.

“We’re living in a very frothy time for the PIPs because of where we were,” Quinn said.

Quotes of the day
“It’s like the big scary boogeyman is coming and I don’t see him yet, but of course we’re only in April. I expect to see it appear by the end of the year.”—Al Calhoun, managing director of Jones Lang LaSalle’s Hotels & Hospitality Group

“Every one of the Starwood owners has picked up 50 basis points of cap rate when they go to sell by entering Marriott’s distribution platform. At the same time, the loyalty program isn’t as generous and it will cost more to maintain assets because of Marriott’s requirements. There’s a thought that there’s going to be some offset.”—Jonathan Falik, CEO of JF Capital Advisors, while speaking about Marriott International’s pending acquisition of Starwood Hotels & Resorts Worldwide. The deal is expected to close this summer.

Stat of the day
More than $20 billion of CMBS hotel loans will mature between now and 2018, Van said, citing data from Trapp LLC. The number is about $8 billion in 2016, $8 billion in 2017 and $4 billion in 2018. The majority of these loans were originated in 2006 and 2007.

Slide of the day

The brand lineup for Marriott International will feature 10 brands in the upper upscale segment once its acquisition is finalized. It is expected to be completed this summer. (Slide: STR)

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