NEW YORK CITY — The coming raft of refinancings in the commercial real estate space over the coming months is set to kick-start the U.S. hotel transaction market.
The sector is still waiting for dealmaking to really take off with the bid-ask spread yet to significantly narrow. Thanks to rising rates, sellers have yet to feel the need to discount and buyers are unwilling to pay what they see as a premium in an uncertain macroeconomic environment.
“I call it more balance sheet distress. Just the fact that a lot of groups are going to be having to refinance, or look at refinancing, recapitalizing at much higher interest rates, that in a lot of cases are double what they're paying before. That's just going to really be the catalyst to want to sell,” said Greg Friedman, CEO of Peachtree Group speaking at the NYU International Hospitality Industry Investment Conference.
Things have changed in the public markets as well.
“The issue has been the quantity of the capital availability. I mean, up until…a couple of weeks ago, the ability to garner a billion and a billion and a half of CMBS debt for hospitality was pretty, pretty weak. I think that's changed,” said Michael Bluhm, managing director, global head of gaming and lodging at Morgan Stanley - Investment Banking.
The difficulty in the current climate is that no one is quite sure about the value of an asset given the mixed signals we’re getting on inflation, interest rates and consumer demand.
“It's a really hard transaction market because it's hard to figure out what is the right value right now what is something really worth and where's the market going to settle? And it's hard to figure out exactly when the Fed’s going to stop raising rates,” said Friedman.
Shift in Lenders
One of the biggest changes in the lending structure of the U.S. market has been the financial struggles of the regional banks and the retreat from lending by even those with a national profile.
“The regulations just keep getting tighter and tighter and tighter. And that's pushing them, they're getting crowded out of the space,” Tyler Morse, CEO of MCR.
Into that gap has come a range of alternative sources of finance.
“If we're all standing around waiting for traditional commercial banks to give us loans, I think we could be waiting for a very long time. So you're going to have to deal with these debt shops, unregulated places and you're going to see some swashbuckling, debt shops go out of business, you're going to see some [long-term capital management]-type things from some of the bigger players,” said Morse.
Capex Considerations
Another factor in terms of the transaction market is the considerable amount of capex that needs to be deployed to turn around tired assets. In a lot of cases owners had no choice but to hold things back during COVID so that they could pay their lenders, pay their staff and ultimately keep their hotels open.
“We're going on multiple years here without significant investments,” said Mit Shah, CEO of Noble Investment Group.
He added: “I think all of that pressure at a time where costs are up 30 percent and supply chain skills are you know in terms of getting things creates another wide swath of stress that is in the marketplace, that I think it's also going to continue to drive transaction as well.”
Flight from Offices
Although concerns over health of the commercial real estate industry have been growing in recent months, the reality is that it is very dependent on the asset class. Hotels have been insulated by rising interest rates and their ability to raise room rates without seeing any tail off in consumer demand. The same cannot be said for the office and retail sectors, which are both dealing with shifts in how people work and shop.
“You're seeing private equity firms that you know, historically looked at lodging 10 percent of the fund now looking more like 20 to 25 a lot driven by […] the fundamentals,” Blum said
A version of this story ran on Hotel Management's sister site, Hospitality Investor.