Chicago in November can be bleak, but a room full of brokers and other hotel industry-related execs kept it colorful during Hotel Management’s Brokers’ Roundtable during the North America Hotel Investment Conference (NATHIC) at the Hyatt Magnificent Mile. The participants touched on a variety of topics related not only specifically to brokerage, but the hotel industry in general: what the landscape looks like in 2015, what segments and markets will be most active, where the deals are, how lending has evolved, insight on PIPs and new technology bridging the gap between buyer and seller.
The roundtable participants, as they appear above, from left, were: Adam Docks, partner, Perkins Coie; Greg LaBerge, national director, national hospitality group, Marcus & Millichap; Chuck Nester, president, Brown Nester Hospitality; Sam Cicero, founder, Cicero’s Development Corporation; Mike Cahill, founder and CEO, Hospitality Real Estate Counselors; Andrew Broad, VP and partner, Hotel Assets Group; and Steve Kirby, principal, Mumford Company.
2015 TRANSACTIONS LANDSCAPE
Last year was a heady year for hotel transactions, and 2015 could even be better as owners seek to capitalize on their investments. However, one thing is for certain, buyers are more disciplined than ever before. Here’s how the roundtable responded to this question:
HM: How does the transactions landscape look in the U.S?
Cahill: You need to break it down by segment. The largest hotels are coming to market and looking at a plethora of buyers. A difference between now and 2007 is that people are tending to stop at a certain pricing level and buyers differentiate each other on other factors. Overall, the transactions market is robust, but buyers are more disciplined. They hit a level and say, I’m done, I can differentiate myself because I have better equity and can close quicker.
Beider: Through October there were about 28 billion in hotel sales. The year before was less, so from a perspective of ‘is there more or less equity or equal?’ There’s plenty. Disciplined buyers are good for all of us.
LaBerge: When you pick apart full service and select service, there’s been a relative constant in terms of the number of trades that have occurred. When you look at the overall trends, the number of dollars transacting is higher because pricing has increased. It’s unbelievably robust.
Nester: Especially within select service: It’s a good product to move and can be financed. The lending community likes us again. There was a lot of that movement turning within the hotel community. There are not a lot of new buyers in that segment; it’s multiple-unit buyers.
“When you pick apart full service and select service, there’s been a relative constant in terms of the number of trades that have occurred. When you look at the overall trends, the number of dollars transacting is higher because pricing has increased. It’s unbelievably robust.”
Greg LaBerge, national director, national hospitality group, Marcus & Millichap
HM: Are you seeing more piecemeal sales, portfolios or a combination?
Beider: It’s everything. There are plenty of individual buyers.
Nester: There’s a lot of portfolio product out there. Those are retail prices beyond any conception of how you could make it work.
Kirby: The stuff I’m seeing is where people develop a small portfolio, say three to six properties, and want to sell it, but they’re looking for maximum top dollar.
Docks: If you’re taking a portfolio to market, there could be a premium as well, just by virtue of taking a portfolio to market.
Cahill: I would differentiate it between portfolios of junk, and portfolios of really strong stuff. We have some on the market now in New Orleans—extremely high RevPAR, great properties, etc. You’ll get strong bidding. Once you get to the 100-million or 200-million level, the ability of these large equity players to leverage at sub 3-percent debt creates yield opportunities. That’s where you get that stretch at the end.
LaBerge: When you look at where sellers are coming from, there are a couple different drivers. I met with office developers who had never gotten into hotels; they’re selling every product they want now. You have folks facing PIPs who say, I’m out. I’ll take my equity and go play in another sandbox.
“Everyone is looking for the same deal demographic—they can upbrand, high barriers-to-entry market…that’s going to drive prices to a level where it doesn’t make sense. It is both a buyers’ and sellers’ market right now.”
Steve Kirby, principal, Mumford Company
Cicero: There have been people looking to buy older hotels. We’re doing a lot of research on these hotels—uncovering a lot of the old stones. Owners want top dollar. The buyers are pretty savvy now and digging in. We’re spending a lot of time looking at all details—windows, HVAC, roofing. Buyers are being a lot more cautious. To try to make the ROI come out of those things is tough.
ON BUYERS’ DISCIPLINE AND PIPS
Cahill: You have those rare windows where it’s balanced. If you really look at the buyers we have, the PIPs are making a big difference. It makes sense to buy today. And it makes sense to build new. It’s been that way for 12-18 months now. It makes sense to buy, to sell and to build new. There are some markets where there is a lot of supply—Louisville, Austin, to name two. Overall, new supply isn’t anywhere near as bad as it was in the last cycle. Good, consistent transaction volume without a huge peak? You almost want to knock on wood.
Broad: Everyone’s been disciplined. The word discipline crosses over to sellers and buyers. On the brands—even though there was a terrible down cycle, as things have gotten better, guests who traded up don’t want to go back. Developers say, if I have that new Hilton or Marriott product, I’ll be ok. People are smarter today. When it goes to the PIPs, they’ve always been an issue. People are looking at infrastructure more. Sellers are ordering the PIPs before they go to market. People are smarter about the process.
“New York, Austin, Louisville, Phoenix, suburban Chicago. There’s an interesting dynamic going on: you have an interesting balance. Certain buyers are willing to go in there to buy and build, and there are others scared to death.”
Mike Cahill, founder and CEO, Hospitality Real Estate Counselors
Cicero: The brands are working with you more now than I’ve seen in a long time. You can move them out a little further to get the ROI on the PIP, but there’s a lot of negotiation going on. We’ve been doing a lot of negotiating with flags.
Kirby: I think you’re going to see lots of new development because there are a lot of franchise agreements expiring in a few years. There’s a trade off to put the PIP money in or sell it and exit.
Beider: In general there’s a lot of discipline, but it depends on the market, the product, the brand.
LaBerge: The spread between 10-year treasury notes and cap rates—that spread is the profit of a hotel. It’s larger now—there’s great value and great opportunity. What’s more interesting is when you compare that spread across product types. Multifamily is smaller, hotels are huge.
Broad: For a while, costs were pretty flat. Developers say there’s an increase in cost of materials. I’m a believer that rates are not going to stay where they are forever. You have to look at the back end, and your exit, and people don’t spend a lot of time analyzing it.
“You have to be careful. The process isn’t let’s just blast this out. If you hit what people want, you’ll knock it out of the park today.”
Andrew Broad, VP and partner, Hotel Assets Group
Nester: The buyers in the marketplace today are hoteliers. They’ve owned hotels before. When you talk about 06, 07—many owners were not hoteliers. In today’s market, with a lot of moving product, there are a lot of well-educated hoteliers.
HM: Where is the equity right now? What are the deals it is chasing?
Docks: There’s absolutely a lot of equity on the sidelines looking for deals. I do expect and see now a lot of newer private-equity funds that have new hotel allocations. They may not be hoteliers, but they’re aligning themselves with good third-party management.
Kirby: Everyone is looking for the same deal demographic—they can upbrand, high barriers-to-entry market…that’s going to drive prices to a level where it doesn’t make sense. It is both a buyers’ and sellers’ market right now.
Cahill: There are buyers above replacement costs now for better, select-service assets that are paying cash. It depends on the asset, etc. Hotels are an accepted food group now. You have uneducated newbie buyers, but also institutional buyers.
Beider: There’s still a lot of EB-5 stuff trying to happen. It’s the only asset class where China can get the job creation to qualify. It’s not easy, but it’s definitely happening.
Nester: Lot of Asian money coming into the west coast. The money comes in waves—Chinese, Japanese, etc. That’s very educated dollars.
LaBerge: But look at here, Chicago. There’s no coincidence that Chicago’s government is in turmoil and their balance sheet is a mess. I used to think this was a high-barrier-to-entry market, but there are 6,000 new rooms either in the ground or in planning stages in Chicago.
Cahill: You need to break down barriers into economic barriers to entry, and physical barriers to entry, like the French Quarter. You can plop up hotels around that area. You also have branding, which is creating barriers to entry. Some developers only want preferred big brands, and in some markets they’re not available.
BRANDS VS. INDEPENDENTS
The question of whether to go with a brand or be an independent hotel is always a decision developers must make. Much of it has to do with questions of financing and distribution. Here’s what the roundtable said.
Broad: The independents are going to be taken over by the brands. Kimpton’s on the market as a company. (Editor’s note: Kimpton was subsequently acquired by IHG in December.)
Beider: Soft branding, to a degree, will limit it.
Docks: Lenders are still more comfortable financing branded hotels instead of independent hotels.
Nester: New construction is still tough. The area, brand, product and equity partners affect that. It’s been hard.
Beider: We’re seeing some new construction debt at 65-75 percent loan to cost. We’re seeing some really attractive stuff.
Cahill: You have to break developers into different categories: A lot of developers are okay with recourse.
Broad: It also has a lot to with regional bank relationships.
Beider: CMBS is being originated and being bought. $100 million in CMBS estimated for 2014.
Docks: Those borrowers should have more options to exit. I still saw a lot of loans made at the end of the recession, at really low rates. There’s also some physical distress out there. There will be a decent amount of product with the distress label on it, but not as many.
“I’m afraid of people getting afraid when they don’t need to be afraid. I’m afraid of people moving away from fundamentals.”
Dan Beider, senior managing director, Paramount Lodging Advisors
HM: So, where is the best place to buy, build?
Cahill: New York, Austin, Louisville, Phoenix, suburban Chicago. There’s an interesting dynamic going on: you have an interesting balance. Certain buyers are willing to go in there to buy and build, and there are others scared to death.
LaBerge: You can look at most of top 25 markets. People say, ‘I want to buy in top 15, I want Marriott or Hilton,’ then you say ‘we’ll find that for you.’ Then 12 months out, what are you looking to buy? We are now gonna go top 30, also include IHG. Now, last couple months, we’ll go top 75 markets. They can’t find product to buy. There’s too much equity. You have people out there now that have overpicked certain markets.
Cicero: Pittsburgh. Renovating old product seems to be really going in that area.
Broad: One of the things impacting Pittsburgh is shale and oil.
Kirby: But what happens when natural gas prices keep falling like they are?
HM: As a buyer or developer, what segments are the most attractive? And how do you pair buyers and sellers in the right deal?
Cahill: The most desirable is higher-end select service. We’re sell-side brokers. We want sellers to have realistic assumptions based on what they have and how the market will react. Realistic pricing expectations.
Broad: I think the process is important. We go out to a select group of buyers off the books. You have to be careful. The process isn’t ‘let’s just blast this out.’ If you hit what people want, you’ll knock it out of the park today. I’ve been surprised at some of what we’ve sold.
Beider: We do sales side. Being able to price a PIP properly.
Cicero: The trouble with pricing the PIP is that it’s not just the pip. There’s more stuff behind it that takes digging.
LaBerge: At the end of the day, the seller wants to make sure they’re not leaving money on the table.
Docks: Factor the PIP in—sellers have been doing it a lot more.
HM: How has Auction.com contributed to the transaction marketplace? Is it beneficial or problematic? What types of assets are successful on auction and which are not? Will we more of these types of sites? Where do brokers fit in?
Beider: I love Auction. You have to have a PIP or you can’t auction the asset. Last year  they sold $258 million of hotels on auction. This year , it’s $260 million through Q3. We’ve sold 15 in the last 18 months. You either get the word out or you don’t. Buyers have to show they have the equity to buy all-cash at the auction.
Broad: The client is coming to us and the auction site. They’re relying on our database and our marketing, but the sale process is run through auction. So they’re still getting good value out of the brokerage, but the actual sale is done by the auction company. It works. The broker gets paid by the client on commission. Auction.com requires a broker presence.
Kirby: You can maximize your value on certain kinds of assets. You can take a less desirable asset there just to move it, but you won’t necessarily get top dollar.
Beider: There are sellers that will not use auction. We have so many deals now though. We’re running non-auction business the way we run in the auction.
HM: Lastly, what keeps you up at night or, conversely, allows you to sleep well?
Adam: I worry about the proliferation of the increase of minimum wage.
Nester: The unknown. I don’t think there’s anything besides natural disaster or terrorism that will turn this cycle for the next couple of years.
Broad: We’re going to see continued growth in number of transactions—no slowdown through 2016.
LaBerge: Absolute optimism. 2015 is going to be a year of some of the greatest numbers of transactions we’ve seen in awhile.
Beider: I’m afraid of people getting afraid when they don’t need to be afraid. I’m afraid of people moving away from fundamentals.
Cahill: 2015 and 2016 will be quite good years. We won’t have huge spikes or huge jumps, but if everything stays at this level, we’ll have two to three more years to be truly happy.
Kirby: I think transaction volume will remain steady for another year or so. I won’t go too much farther out than that, though.
Cicero: I think there’s a lot of existing buildings that need to be looked at—some can be repurposed, but spend time and energy to dig deep and come up with alternative ways to be creative with how we’re putting money in, etc.