This is a New Year! 2014 is now upon us and moving along.
There is one thing we all know with certainty. Life is a function of time. As strange as it may seem, so is the hotel business as are bad economic times.
Here is what we know about the hotel business in the last few years since the economic downturn began. I still remember vividly, it was around 2008 that the bottom kind of collapsed. I worked with Marcus & Millichap then as their hotel broker in the mid-atlantic region. I worked out of their DC office (all right – it was Bethesda). Brokers were scrambling trying to find out how they must react. Life was confusing even for a middle-aged man such as myself. Where do we go from here I wondered? Some colleagues were young folk, sprightly and full of zest at the opportunities that seemed plentiful just a year or two ago. They too had suddenly lost a step.
The chatter was strong about what was coming, the doom, the mother of all recessions, the cosmic bubble, and almost any gloom and doom cliche you can think of. The business heads and lead strategists were scheming about what it is they could do to keep morale up. Buyers were around as were sellers, but the banks had all but vanished. The Apartment brokers felt good as lending was still available for the right deals.
As for hospitality, it was the realm of lepers as far as the banks were concerned. It was toxic to consider lending for hotel transactions and that notion hasn’t completely vanished quite yet. That is when I participated in the Special Assets Services group (SAS). We needed to rethink our business strategy and retool skill sets and rethink databases. We approached banks, lenders to see if we could assist in the disposition of hotel loans that we could market to our national client base. We could do Broker opinions of value for banks and we did. We did what we could to survive. Some colleagues and I also did a stint as CRE analysts for the FDIC to help sift through piles of paperwork to determine the underwriting banks required prior to loan approvals. It was rewarding but, yet somehow left us demoralized.
Some survived the tough times as brokers and some didn’t. However, there were deals to be done. Very few, but still around for the persistent broker. Like the old saying goes, when the going gets tough, the tough get going. Only this time, it was for real. All involved in any segment of the CRE life cycle reinvented themselves to a degree and survived.
The recession was long indeed. In fact we learned that the recession had actually begun much earlier than we thought. We just felt the concussive forces hit us a year and a half later. Now, around early 2010 the recession was no more we were told by economic pundits. But, this was a recovery without job growth they surmised. What? Yes, the bleeding had stopped. However, consumer confidence was still low. Jobs were hard to find for most people. The hotel industry struggled with an influx of tremendous supply around 2009. All hotel measuring indices were declining. Hotels that were coming up on their balloon payments were essentially doomed. They had in most cases worked really hard to amass negative equity.
Most aggressive hotel owners had previously refinanced their mortgages to take out cash – sometimes in the millions of dollars. Given the 1031 Exchange paradox they were faced with decided to buy into ridiculously priced hotels in that time frame. Such was the demand for hotel assets then, that prices went unchecked. Why would they care anyway? The banks were lending based on terrible underwriting standards by appraisers. The appraisers were too busy to care. The banks were too busy up selling loans to CMBS powerhouses, that they didn’t have time to pause. Then when the proverbial dung hit the fan, it all came trickling down. No wait, pouring down!
Banks were closing, owners were losing their assets and their homes in some cases and brokers like me just shook their heads in shock and dismay. These owners were friends and confidantes that we had worked with. How could you not feel for them? Banks were afraid to lend despite historically low-interest rates. Equities in hotel properties were so low it was hard for anybody to do anything. Banks were just as lost because they didn’t have the expertise to operate hotels but they just couldn’t write off the entire loan either – at least not without the FDIC’s blessings.
The owners meanwhile, were scrambling and hoping the market came back strong and they somehow hung on for dear life. Some thought it prudent to just stop making payments and paid a heavy price. Others figured out a way to work with their banks and held on to their properties. A few were blessed to be in the right location with the right franchise. Owners with multiple assets were able to leverage equity in other assets to finance the ones that had come due. Others were not so lucky. This was the story through much of 2012. The recession technically ended – 2010 or somewhere then. Recessions make their pain felt long after they are supposedly finished.
The turn around year 2013:
Now, 2013 was the year things began looking up, but not so around DC. The Govt. had other plans! The great two party system and their leaders just loved fighting and squabbling over the most meaningless measures like churlish children. They shut down the Govt. for a few weeks but made sure they paid the employees, but thought nothing of the Billions in lost productivity, and billions in lost revenues for the Govt. and smacked hotels across their collective faces with sequestration! These are the people we put our trust in to shepherd us toward good times again. The irony in that is hopefully not lost on you!
Here is analytical data from Real Capital Analytics for total volume of hotel sales broken down by distress sales as a percentage of total sales from 2008 to 2013:
What you find in the image above is that the distressed assets as a percentage of total sales is declining steadily. However, in the last quarter of 2013, you suddenly find a bump in distressed sales. It could be due to the fact that loan sales although declining, are resulting in additional foreclosures brought on by borrower defaults. The special servicers are liquidating portfolios they took on earlier, since the markets are have stabilized and performing much better. Also, the banks are less inclined to work out loans or write them off these days and are foreclosing on defaulting borrowers. The foreclosure process takes time depending on the state you are in.
Elsewhere around the country, RevPARs increased across the board, especially in the upscale to upper upscale and luxury segments. The mid-tier and economy segments also had somewhat subdued gains as well. There was hotel development activity ticking upwards as was transactional velocity. This was beginning to resemble a recovery for sure. However, not all hotel owners felt like they did better in a tangible manner over 2012, but that is another blog altogether. Here we are now, looking at 2013 in the rear view mirror as we move into 2014.
The here and now – 2014:
From all available indicators and metrics, 2014 looks like a great year for hotels. RevPARs are trending up as are ADRs and Occupancies. Development activity is brisk from all indications. The conundrum is that while the demand for luxury hotels is the highest, the supply seems to be the lowest. Nobody including banks seems to have any appetite left for Million dollars / a key kind of project these days. Ironically they don’t seem to have an appetite for mid-tier and economy hotels either! Now, at least there is rationale for that vis-a-vis metrics and data from STR and other sources.
The segment that is making great strides is the upscale to upper-upscale segments. Franchise behemoths like Marriott, Hilton and IHG are leading the way. However, my concern frankly rests with the hotels owned by individual entrepreneurs – the economy and mid-tier property owners who toil every day to service this industry. What happens to them? They are not getting funded easily. They don’t have the cash flow to keep up with franchisor PIP demands. They are losing equity each day they hold on, but with the market shifting in 2014, things may improve.
In future blogs I plan on looking at STR and other data and metrics and posting my opinions on them. I may also blog about transactions and other hotel related news. Since this is my very first attempt at writing, please provide input in the form of constructive criticism of a welcome note of encouragement! It would be appreciated and hopefully you will continue to read.
The first month of 2014 have large portfolio owners and special servicers like CW Capital unloading their portfolios. This may be a sign for hotels to sell as the capitalization rates are moving down and banks are moving back in to the space. Hotel REITs are amongst the best performing asset classes as well. As we’ve seen, these windows of opportunity aren’t eternal, but need to be taken advantage of when available. This may be as good a time as any for hotels under previous stress of any kind to get moving and get their properties evaluated for sale.
Sperry Van Ness has one of the most robust National Marketing Platform in the country anchored by the most qualified bikers and the most cutting edge technology. They are one of very few large platforms that are committed to co-brokering deals. This is a great advantage to sellers in my personal view. Also, SVN hospitality brokers are spread across the country and are qualified, willing and able to assist hotel owners in their acquisition and disposition efforts. Please don’t hesitate to contact us for any hospitality requirements you many have.
Here is one that is a great buy and for sale in Aurora, IL. Contact me for more details. Later folks!
Vikram Antin | Managing Director
Sperry Van Ness | AREAS