Cautious optimism at New York Hotel Investment Summit


Stephen Rabinowitz of Greenberg Traurig, left, and Starwood's Mark Purcell.

NEW YORK — In the shadow of the tumultuous debt ceiling negotiations in the U.S. Congress, hotel developers and advisors met to discuss the uncertain state of the U.S. hotel market at the New York Hotel Investment Summit held at Manhattan's Roosevelt Hotel.

There was an immediate consensus that certain brands had overdeveloped before the 2008 financial crisis, and are still not operating at peak profitability.

“There are too many brands out there,” said Daniel Lesser, president and CEO of the recently formed LW Hospitality Advisors located in New York City. “For a brand to be successful it needs to reach critical mass. There are brands that are good brands that are not at critical mass and won't hit critical mass if they're not blended with other brands.”

At the same time, while luxury and full-service hotels continue to lead in rate, a lack of new development has led underrepresented brands to struggle to grow. “Luxury brands that need to expand are having trouble,” said Michael Sonnabend, managing partner of PMZ Realty Capital. “A lot of our clients have cut expenses to the bone over the last few years, and those that had a lot of financial distress have been pushed out.”

“In the past year, you've seen rates really come out in major markets,” said Richard Russo, VP of development at Morgans Hotel Group. “They've been really driving prices up in those markets. Certainly, over the next twelve months, you'll see REITs continue to be active although now financing is becoming more and more available.”

Daniel Lesser of LW Hospitality Advisors.

From the global brand perspective, cost-cutting measures have been effective and have led to further development. “We're seeing significant RevPAR growth, and still getting the benefit of some cost containment measures we put in place from 2008 to 2010,” said Mark Purcell, VP of managed full service development at Starwood Hotels and Resorts Worldwide.

When it comes to completing deals in today's financial climate, the ability to close all-cash is key. Morgans, for instance, sold off the Royalton and Morgans hotels in New York City to FelCor Lodging Trust. “As a seller of hotels over the past couple months, we looked at surety to close,” said Russo. “REITs can close all cash within ten days.”

For Starwood, local financing is becoming a more important addition to the capital stack. “This year we signed the Westin Denver Airport project, which was funded by general airport bonds,” said Purcell. “In certain other projects we'll have public financing of some sort or contributions from the city. It's another aspect to add to the capital stack to be successful.”

Lesser also noticed the disappearance of CMBS loans from the marketplace, due to the uncertain financial situation in the U.S. “I had lunch with a major CMBS lender yesterday who articulated that at this point, they are hold onto cash and don't see a whole lot of activity for the rest of the year,” said Lesser. “The August 2 date is causing fear in the market. I said you don't make money sitting on cash, but they said you don't lose money.”

The financiers discussing the debt markets in a later panel were more bullish on the overall economy and availability of lending.

"I'm not sure I'd be going out and celebrating [the U.S. government] default, but there's a lot more to be bullish on in regards to a successful restructuring," said Jeff Dauray, VP of acquisitions for RLJ Lodging Trust. "If you rewind the clock 18 months ago to declining rates and occupancy with the credit markets shut down, it was a very different time to restructure a loan given the uncertainty."

Dauray explained that the industry's recovery has given more options to lenders and those seeking financing. "Given the underlying fundamentals of where we are now, healthy RevPAR with constrained supply, there's a lot of fuel right now to restructure and work out some of these looming maturities," said Dauray. "There are signs the debt market is rapidly recovering. There's a tendency to compete for deals with those lenders, and as that phenomenon continues and leverage begins to creep up to be a bigger part of capital overall, we'll see an active recovering debt market."

Regardless of the result of the political drama in Washington D.C., in other words, the hotel industry remains in a cyclical upswing.


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