A new flash survey from LIIC – The Lodging Industry Investment Council provides a snapshot of the rapidly evolving hotel investment market in light of COVID-19 as well as a comparison to the think tank’s first flash survey on March 15.
Mike Cahill, LIIC co-chairman and CEO/founder of HREC – Hospitality Real Estate Counselors, produced the flash survey, along with HREC senior associates James Few and Christian Walsh.
Here are results from the latest survey:
1. Over a year for property level hotel cash flow to rebound: In a major switch from its original survey, 91 percent of LIIC members now believe that hotel asset level net operating income impact from COVID-19 will not normalize (a return to 2019 cash flow performance) for at least another year. Previously, 75 percent anticipated full normalization within a year.
2. Recession is here: 94 percent of survey responders believe 2020 should be considered a recession year. With sadness, it is time to officially say goodbye to the greatest 10-year hotel investment upcycle in our lifetime.
3. Buyers cautiously increasing activity: Currently, 57 percent believe the time is right to submit letter of intent to purchase for new hotel investments, a 21-percentage-point increase from 36 percent just 40 days ago. For hotels under contract, results are consistent that 75 percent of buyers believe the contract should be extended, revealing that investors still want to close transactions. 86 percent of responders believe a buyer is entitled to a retrade, if warranted, due to anticipated short-term cash flow impact, a 14 percent increase from the March survey results. The question is “how will sellers respond to a desired pricing retrade?” While 64 percent of investors state they are still cautiously underwriting new lodging investments, 74 percent are taking a wait-and-see approach at the same time. Shoppers versus real buyers?
4. Hurdles to cross for closing transactions?: A review of both the March and April surveys reveal two dominant concerns that may hinder return of a healthy lodging property transaction market—frozen traditional debt financing and closing of a bid/ask spread between buyers and sellers. The amount of necessary downward pricing adjustment from February 2020 values to facilitate a closed transaction is still in flux. Even once the amount of justified pricing discount is quantified, buyers are still left with the issue of whether sellers will allow their assets to trade at the new pricing or will opt to just hold. On positive notes, hotel investors are getting creative with 20 percent noting an increase in seller debt financing and 15 percent of sellers offering preferred equity investment to buyers. Moreover, hard-money lenders featuring 8 percent to 9 percent interest rate bridge financing are stepping up to the plate quickly.
5. Hope for debt to become more active: 87 percent of new hotel purchase and sale contracts are anticipated to have debt financing contingencies (essentially nonexistent the last five years) added in conjunction with longer due diligence periods. The April survey indicates investor concern about the speed of the hotel lending comeback, with 72 percent expecting no increase in refinancing activity in 2020, a 49 percent increase in negativity from March. The collateralized mortgage-backed securities market continues to stall, with 86 percent of buyers and refinancers reporting an inability to get debt quotes.
6. Top three threats to hotel investment remain constant: COVID-19, anticipated economic recession and a decrease in domestic corporate and leisure travel.
7. Further lowering of hotel transaction levels anticipated for calendar year 2020: Over the past 40 days, investors have become increasingly negative on the overall hotel transaction market. In LIIC’s March survey, only 9 percent believed the total dollar volume of U.S. hotel transactions in calendar 2020 relative to year-end 2019 would decrease more than 50 percent. Today, the percentage is 32 percent. The total number of assets forecasted to be sold by year-end 2020 is anticipated to decline more than 50 percent by 36 percent of responders. More favorably, 25 percent anticipate a lesser decline in number of assets exchanged (10 percent to 20 percent decline) and 30 percent envision a 25 percent to 50 percent drop.
8. CARES Act and the Payroll Protection Program: The performance of the CARES Act and PPP component under the Trump administration is viewed favorably by 61 percent of survey responders. 27 percent believe execution was above average, with 33 percent viewing it as expected, good and bad.
9. Hotel asset values drop: Of particular note is the theoretical perceived drop in individual hotel asset value, on average, from Feb. 28, 2020, to April 25. 40 percent of investors believe a decrease of more than 30 percent has occurred. 25 percent of responders estimate a decline of 10 percent to 20 percent and an equal percentage see a drop of 20 percent to 30 percent.
10. REO asset sales in 2021 and 2022?: Real estate owned by lenders as a target purchase category by hotel buyers is increasingly being discussed. 56 percent believe the wave is coming and lenders will take control of hotel assets. However, 44 percent believe that this REO wave will not materialize as “extend and pretend” kicks in and loans are worked out without foreclosure.