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Taking hotels from bearish to bullish in just 12 months

Many opportunists on all levels of the spectrum established funds earmarked to purchase distressed assets in Q2 2020. (Getty / iStock / Stork)

After surviving a year like 2020, many hoteliers just won’t believe that 2021 is the time to sell but in many cases that assessment may be true. At this point last year, the only buyers were the bargain basement groups. However, a short 12 months later, lodging investors are plentiful and cash-strong. 

Though many draw parallels between the financial crisis of 2008 and the past year, they are dissimilar in several key areas. During the previous crisis, several factors that caused distress throughout the economy are not applicable today. Those factors include overleverage on virtually all real estate asset classes with corresponding stress on banks and other institutional lenders, a loss of confidence in all financial establishments and a prolonged recovery period.

Reducing Risk

When COVID-19 struck, the US economy had enjoyed 11 years of solid economic growth, which was longer than previous positive cycles. In anticipation of some type of downturn, savvy owners and investors had reduced their risks to better weather such an event. Of course, no one anticipated the immediate impact of a virus that virtually shut down economies so quickly.

In second quarter 2020, lenders and buyers anticipated a flood of distressed properties, with accompanying discounts, having to be sold quickly. Many opportunists—on all levels of the spectrum—established funds earmarked to purchase these distressed assets.

However, having weathered the write-downs of the previous financial crisis, many lenders worked with borrowers through deferrals and other means to protect their various interests and avoid foreclosures. Federal funds were infused to protect jobs and the financial system. Instead of the bottom falling out on lodging assets, the various public and private assistance did as intended—shore up and strengthen the economy. The flood of distressed properties did not materialize. Some troubled assets are certainly on the market, with more to come, but not at the levels that most anticipated.

Midyear 2021 brings a variety of vaccine options, an abatement of the virus impact and the reopening of most domestic schools and state economies. Leisure demand is tracking close to 2019 levels, and it seems likely that commercial travel won’t lag far behind. Smaller conferences are already happening, and future bookings look very promising. The trajectory of the economic recovery very much seems to be in the upswing of a “U”-shaped recovery.

Road to Recovery

At this point, the referenced accumulated monies need an investment vehicle or will need to be returned to investors. These well-capitalized buyers are pursuing a small number of available offerings, causing upward pressure on asset pricing. The high cost of goods and labor and the limited funding available for new construction have driven even more capital into the acquisition arena. This situation may be a short-term phenomenon because capital typically doesn’t linger long before investment. Debt sources continue to reopen their doors to hospitality lending and that increasing availability will push asset pricing from a different side.
Brokers have had significant buyer demand in 2021 and anticipate the trend to continue throughout the year. As always, it is recommended that owners consult with legal and financial advisors before entering the market. In the next year, this advice may be even more consequential as changes to 1031 exchange and other proposed tax law changes may apply to real estate transactions. 

If your goals include cashing out, capital redeployment, investment planning or any of the myriad other reasons for disposition of an asset, now is a very good time to speak with your investment professional about options. 

Steve Kirby is managing principal at Mumford Company.