PHOENIX — Market fundamentals are constantly shifting, with a multitude of factors at play for lenders anticipating potential returns on investments.
For example, states in the U.S. Sun Belt region — including North Carolina, Florida and Texas — are and have traditionally been high on investors' lists. But Bruce Lowrey, managing director of investments for CIM Group, said it's uncertain whether that will remain true.
“Everybody today says Sun Belt. Tampa, Charlotte, Phoenix, Nashville. Is that true 10 years from now?” he asked during a meeting of the Lodging Industry Investment Council during The Lodging Conference 2023 in Phoenix.
San Francisco, meanwhile, is considered among many lenders as high risk, but that could also change.
Carlos Rodriguez, chairman and CEO of Driftwood Capital, said high barriers to entry, overall growth and diverse demand generators are what he looks for in a market in regard to development. Generally speaking, Sun Belt states check all of these boxes.
“We look at different factors,” he said. “Populations, new jobs being created because that represents demand.”
Economic growth, in particular wage and income growth, and household formation are also good indicators of the strength of a market, Lowrey said.
Lowrey said that in a recent conversation with an industry colleague, he asked what their top market choice would be if they could make an investment today that would hold in 10 years. Their answer was Las Vegas.
“With the sports teams coming in there and you have now corporate demand, you have a lot of household formation. The dynamics of demand in Vegas … are going to change dramatically and make it one of the strongest markets served,” he said.
College towns in the Power Five sports conferences — Big Ten, Big 12, Atlantic Coast Conference, Southeastern Conference and Pac-12 — especially those with a large medical center, are also desirable to develop in, said Monty Levy, managing director at HREC Investment Advisors.
“There's that added benefit in a college town of true barriers to entry to find. Most college towns … they're very protected. It's the classic indies. They're very protective of new development, architectural style,” he said. “I do think that they’re really a diamond in the rough, a lot of them.”
Florida still has its merits as a desirable state to build in with its combination of both urban and leisure markets, but rising insurance costs due to storm risks jeopardize its strength moving forward, said Thomas Prins, principal of TQP Capital Partners.
Bhavnesh Vivek, vice president of hotel acquisitions for The Radco Companies, said he was about to close on a hotel in St. Pete, Florida, two days before Hurricane Ian, a Category 5 storm, struck the state. Prior to the hurricane hitting, the insurance price was $80,000 a year. After the storm, it was $450,000.
This has become a “big issue” with loan covenants, GF Hotels & Resorts Chief Development Officer Jeff Kolessar said.
“When these premiums come up, if you can't get it, you're in a default under your covenant on that,” he said.
The struggles of the San Francisco market since the pandemic have been well-documented and epitomized by Park Hotels & Resorts ending payments for a $725 million loan on two hotels in the city in June. LIIC members present were asked whether they would consider a listing on a full-service, first-class hotel in downtown San Francisco.
“I wouldn’t lend on it,” Lowrey said. “I wouldn’t even consider it.”
Rodriguez said he would take it into consideration, but only if the price was drastically cut and if the property were to be in a favorable submarket due to the uncertainty.
“I would definitely underwrite and look at it, but it has to be a significant discount to compensate for the risk,” he said.
The city of San Francisco is attempting to turn its perception around; it recently hired a public relations firm to push back on some of the negative press, said Emmy Hise, senior director of hospitality analytics for CoStar Group.
“[With] the concerns of crime and safety, San Francisco's probably gotten the worst national press out of every single market,” she said. “Portland kind of softened a little bit in terms of their national bad press that San Francisco just continues to get, so that's going to impact leisure visitors thinking if it's safe to go there, or if groups and meetings want to go there when they keep hearing this negative space.”
David Duncan, president and CEO of First Hospitality, said San Francisco, Portland and Minneapolis are all less desirable markets than a city like Chicago “by a longshot.” Jeff Dallas, chief development officer for StepStone Hospitality and a Minneapolis resident, agreed.
Dallas said when you look at both historical and forward-looking data, it’s hard to see these markets returning to their pre-pandemic levels in the near future.
“There's certain markets where you have to ask yourself, are they permanently impaired?” he said. “That doesn’t mean you still wouldn’t invest there, it's just a matter of when you look at historically … you're like, ‘Oh, we’ll get back there if we do a little better.’ Now you're looking at some markets, and I’ve been beating my head against Minneapolis and Portland.”