ATLANTA — Executives of publicly traded hospitality real estate investments trusts and Wall Street investors say it's too soon to tell whether the banking crisis is a canary in the coal mine or a blip on the radar.
One thing they are sure of, however, is that hotel industry fundamentals are strong.
Scott Trebilco, senior managing director of real estate at Blackstone, said during the "Main Street Talks" panel at the 2023 Hunter Hotel Investment Conference that the industry has shifted from being inwardly focused to macro-focused.
Many debated whether leisure demand would cool off or if business travel would stabilize, he said.
"I think we've largely answered all those questions now ... and it's easier to underwrite. The supply picture is very clear [and] what that's going to look like," he said. "It's actually kind of refreshing to talk more about some macro considerations as opposed to some of these micro questions that we've focused on."
Jonathan Stanner, president and CEO of Summit Hotel Properties, warned hoteliers not to fixate on medium-term risks associated with the banking crisis. Hotel supply growth is expected to be half its historical average this year, and that trend will likely continue for the next two to four years.
"Between that and what we've done to improve the operating models in these hotels ... the long-term outlook for this business is tremendous," he said. "I think we've consistently demonstrated that travel continues."
Rebuilding Confidence
Though there are positives to count on, executives said the recent collapse of U.S. banks Silicon Valley Bank and Signature Bank and the financial worry surrounding Swiss bank Credit Suisse has shattered some confidence. Apple Hospitality REIT director and CEO Justin Knight said that has been a common theme in the past few years.
"It's certainly not the first of the major incidents we've seen. I think all of us can agree, it's been a rocky recovery [since the start of the pandemic]. There was a lot of money that came into the system, we've struggled with high inflation, the Fed has taken very aggressive action and signaled in essence that they're looking to cause a recession in order to bring inflation down," he said.
The banks and the wider financing industry as a whole have struggled with a confidence issue, Knight said.
"What happens with banks in this type of situation is people pull their money out, and that exacerbates issues that may not have been a problem otherwise," he added.
Stanner said it doesn’t matter how well-capitalized a bank is, the reality is no bank can withstand massive waves of withdrawals coming out over night.
Now, the wait-and-see will be how the Federal Reserve responds, Knight said.
“Do we begin to see inflation come down or do we continue to see high inflation? My sense is the Fed continues to act aggressively and we see more of these little things around the edges," he added.
On March 22, the Fed raised interest rates by a quarter point.
Stanner said that individuals still have scars from the Great Recession. This time around, however, it’s important to draw the distinction between the fact that there isn’t a credit quality issue.
"So much of this is tied to psychology and confidence, that I think it creates a very challenging process for the regulators, the Fed [specifically], around walking this fine line between making sure the regulations are appropriate and also having this deflationary environment," he added.
Trebilco said the impacts of the banking crisis are bifurcated between impacts to Main Street and impacts to Wall Street.
"If you think about the to two big failed banks, [they're] very heavily concentrated in Wall Street, big [corporations]. The lifeblood of most of the commercial real estate funding market is through regional [and local] banks; 67% of that market comes from them," he said. "However this falls out, there's going to be an impact on liquidity in that system. It's going to take some time for that to digest itself.”
Turning Crisis Into Opportunity
Marcel Verbaas, chairman and CEO of Xenia Hotels & Resorts, said "we Wall Street types" look at this crisis as an opportunity.
"There might be an opportunity for us to be able to be a little bit more acquisitive than we've been over the last couple of years to the extent there's some more product that's coming to market," he said.
Knight agreed some public companies are in a unique position now as they have significant liquidity, either via cash on the balance sheet or ready access to lines of credit.
“Our cost of capital is obviously higher than it was, our interest rates are higher, our stock price is not where we all think it should be and there's a couple things that play into that," he said. "We have uncertainty about what the second half of the year is going to look like, probably even more so after the past 14 days."
He added the uncertainty makes it more appealing to look at some alternative uses of capital, including share buybacks, investing in his company's hotels and finding outsize return on investment opportunities.
"Those are the types of things we need to balance in this kind of environment," he said.