ATLANTA — A common perception among U.S. hotel owners today is that unless you're forced to sell, you shouldn't. That's led to what many see as a lack of hotel deals on the market. Investment experts say that could soon change, but it's also hard to trust the metaphorical tea leaves on much of anything these days.
Noble Investment Chief Investment Officer and Managing Principal Ben Brunt said strangled capital markets — with banks less willing to take risks in lending — are contributing to a slower pace of transactions. But a lack of financing, and inability to refinance, could also lead to more distress among hotel owners, which could force more to sell.
“During the pandemic, there was no performance and owners still had some perceived value. The bid-ask [gap] is very challenging. Nothing really got done unless it was almost forced. Then, we’ve had this great run of 18 months where there was a lot of activity, capital markets were at our back, performance was headed in the right direction, but now we’re going back to this weird moment,” he said during an investment insights panel at the recent Americas Lodging Investment Summit Summer Update. “Capital markets are certainly getting in the way.”
Pressure on owners isn't just coming from the banks, he said.
“That’s the reality of this environment,” he said. "There’s always going to be pressure, whether it’s from a brand, from a partnership that’s been through the ringer, from a loan maturity, from a deferred maintenance need. We’re beginning to see what I would call more stressed situations, not distressed necessarily.”
Owners also will need to come to terms with the fact that their hotels could be worth less today compared to a year ago despite industry fundamentals being strong, he added.
Amanda Chivers, managing principal at Crown Hospitality Consulting, said buyers are still in search of discounts. Their viewpoint is if they’re going to put money into a market that has uncertainty, it needs to be worth their while.
“It’s really hard to pinpoint pricing; it’s really hard to pinpoint the cost of repositioning or capital expenditure you’re going to have to put into a project in order to execute on a plan and get value,” she said.
Brunt added that Noble was comfortable underwriting deals in 2021 and through 2022. Now, his team is having a hard time trusting forecasts when underwriting.
Adding “to the trepidation,” he said, “is the lack of transaction activity that’s out there.”
Bharat Patel, chairman of the Asian American Hotel Owners Association and partner of Gulf Coast Hospitality Management, said AAHOA members are in constant search for the upside in acquisitions.
“We all expected interest rates to keep on going down at one point. They can’t get to zero, but people still planned the capital stack to only be [so] much,” he said. “Now, the problem is they can go even higher. You’ve got to program in that capital stack, and it’s not easy to forecast.”
Not knowing where the Fed is going to head with interest rates and the rise in labor costs is a challenge, Patel said.
“There’s no one in any state that’s saying the minimum wage is going to go down. Labor costs are not in the 25% to 28% range; it’s going to go higher and higher. And the capital stack keeps going up,” he said. “What do you do? How do you value something today for the next four or five years?”
Hoteliers are also grappling with rising insurance costs, which is putting pressures on margins.
In some locations, such as Florida, the majority of hotel owners are facing increases of 25% of more on insurance costs, Patel said.
In the Northeast and Midwest, however, some are saying “why do we have to pay for your hurricanes in the Florida and Gulf Coast area?” he said, acknowledging “they’re facing increases, too.”
Some locations in Canada have faced almost 200% increases in insurance, Patel said.
“The insurance marketplace is really narrow now. There’s not many underwriters, and it really hurts,” he said. “That is a key piece — not just labor, not just capital stack, but that extra cost that’s there that you never imagined.”
Chivers said there have been cases in which buyers can’t close on a deal because of insurance issues.
Brunt said there are a lot of hotels that Noble would like to own, but it’s more important for the investment company to stick to its metrics, continue its track record and the ability to raise capital.
“We’re not just looking at [net operating income] and using that as the metric of what we’re buying off of. We have the advantage internally of a lot of different tool kits that allow us to think through the operating model, how we’re going to modify the spaces within the asset to make it more revenue-generating, more profitable and look at every opportunity as a value-add opportunity,” he said.