The Lodging Industry Investment Council surveyed its members on March 15 to take a snapshot of the current state of the hotel investment market in light of COVID-19. Members of the think tank include investors, lenders, corporate real estate executives, real estate investment trusts, public hotel companies, brokers and lodging equity sources.
Based on the responses it received from the survey, LIIC offered nine takeaways on the current hotel investment environment:
- Industry insiders believe hotel cash flow will rebound relatively quickly: Twenty-seven percent of respondents anticipated full recovery to occur within six months, while an additional 48 percent believed full normalization will occur within six months to a year.
- Buyers take a breather: Sixty-four percent of respondents have stopped submitting letters of intent to purchase while only 36 percent are going forward. About two-thirds of LIIC members said they believe in moving forward and continuing to underwrite new hotel investments under more focused and revised parameters.
- Temporary bid/ask spread issues: Seventy-five percent of LIIC members said hotel investors with assets under contract are entitled to a retrade on price based on short-term cash flow impact. However, 72 percent also said if a hotel is under contract for purchase, the closing date should simply be extended. A small 16 percent are still proceeding directly to closing. According to 73 percent of survey respondents, sellers with product on the market are adjusting ask prices downward.
- New hotel investment parameters: Seventy-nine percent of new hotel purchase and sales contracts are anticipated to have debt financing contingencies added. The group also said to expect longer due diligence periods in any new purchase and sales contracts executed in coming months.
- Debt refinancing: The collateralized mortgage backed securities market has currently stalled with 83 percent reporting an inability to get debt quotes. Historically low interest rates are anticipated to survive the COVID-19 pandemic and 39 percent believe the industry will see an increase in refinancing activity later in 2020. Still, 40 percent of investors said they believe appraisals are coming in higher than lenders and buyers are using in loan underwriting.
- COVID-19 is the top threat to hotel investment: Anticipated economic recession and decrease in domestic corporate and leisure travel followed as the second and third highest threats to hotel investment. LIIC noted the disappearance of the previous top investment concern—new hotel supply hotel additions.
- Government commandeering hotel assets: Forty-three percent of LIIC anticipated issues with the federal government and/or state governments potentially commandeering hotels for use in housing virus-inflicted patients or other related purposes.
- Hotel transaction levels for calendar 2020: 50 percent of respondents said they believe the total dollar volume of U.S. hotel transaction will decrease up to 25 percent in calendar 2020 relative to year-end 2019. Thirty-four percent predicted the impact will be greater and produce a 25 to 50 percent decline in dollar volume. The total number of assets forecasted to be sold by year-end 2020 is anticipated to decline up to 10 percent by 20 percent of respondents. Thirty percent said 10 to 25 percent and 32 percent said 25 to 50 percent. Compared to 9/11, when transactions/lending virtually stopped, LIIC considered this positive.
- The U.S. faces a recession in 2020: Following the traditional definition of a recession as two consecutive quarters of negative gross domestic product growth, hotel investors believe 2020 is a recession year. LIIC, however, predicted a relatively quick rebound.
Mike Cahill, LIIC co-chairman, produced the survey. Cahill is the CEO and founder of HREC, a hotel and casino brokerage and advisory firm. James Few and Christian Walsh, associates in HREC’s Denver office, assisted throughout the process.