LOS ANGELES — This year, the rubber hits the road for hotel deals.
At least that’s the hope, according to members of the Lodging Industry Investment Council. Members recently met in Los Angeles to debate likely recovery scenarios different segments of the hotel industry should face in 2022.
Hotel owners and investors in the room said it’s time this year for solid hotel deals priced right to hit the market for waiting buyers.
“It’s going to be a good acquisitions year,” said Roger Clark, executive vice president of hotel acquisitions at The LCP Group. “Debt markets are finally cooperating. There’s equity. Now our partners want to be acquisitive. It’s going to be an action year because smoke is clearing on trends and patterns.”
The Bid-Ask Gap
Part of that clearing includes a tightening of the bid-ask spreads that kept many buyers waiting on the sidelines last year.
Steve Kisielica, principal at hotel acquisitions firm Lodging Capital Partners, said the kick-the-can period of patient capital and sellers not wanting to let go of assets at distressed pricing may be at an end.
“This year or next we’ll get to the point where those who want to sell will, and pricing will be more attractive for the investor because deal flow will be a multiple better than it has been.”
Chris Diffley, managing director of investments at Rockbridge, leads the company’s investing team and said 2021 was a “productive year” for acquisitions, and forecasts that barring additional COVID-19 disruption, 2022 should be, too.
“Spreads will compress and there’s already substantial liquidity in the debt markets,” he said.
What’s Attractive?
Buyers said that while there’s appetite for all types of hotels, they’re seeing movement now for select-service properties in particular.
“Select service has been aggressively targeted by low-cost capital,” Clark said. “We’re all trying to find other opportunities in full-service, resort and other market areas because the commoditization of select service happened right in front of our eyes.”
While construction slowed during peak pandemic periods, select-service hotels cost less to build, so a lot of developers are hitting that segment hard.
“There’s a lot of new-construction select-service out there because there’s a market for exit,” Clark said.
Julienne Smith, senior vice president of development, transactions and asset management for IHG, said the majority of IHG’s pipeline is new-build, though conversions still play a role.
“Our expectation for conversions matched what we thought it would be for us, but we still have new-builds on the books,” she said. “My hope is the costs involved find some relief this year, whether that’s costs for labor, cost of construction, even cost of renovations.”
It didn’t take long for the often-mentioned “wall of capital” to be referenced in the context of hotel deals.
Bruce Lowrey, chief lending officer for Access Point Financial, said the industry should expect renewed interest from institutional investors seeing hospitality in a new light.
“That wall of money will come back and lead to more capital, more leverage and tighter spreads,” he said. “What’s happened to retail and to office could make hospitality a core level of investment for institutional capital.”
More Challenges
Since 2020, hoteliers have been waiting to snap up distressed assets, but they may be waiting a little longer, LIIC members said.
In a related LIIC meeting, FTI Consulting’s Senior Managing Director Alan Tantleff summed up the distress environment.
“All the fundamentals are there for more distress except one — we’re just awash in capital and that has bailed out so many people,” he said. “People are waiting on [distress], to capitalize on it, but it’s been very slow.”
While many in the room said 2022 has brought a measure of increased visibility to what had been a cloudy deals outlook, one hotelier had a word of caution.
“We’re faced with a downturn where we’re just assuming that once the pandemic is over, things will go back to the way they were,” said David Berins, managing partner at Berins & Co. “I worry consumers are permanently affected and their behaviors — where they work, where they meet, whether they go to trade shows and large conventions anymore — will be different.”
And even small shifts in human behavior have an impact on the fate of a real estate asset, Berins said.
“You have to underwrite different options based on what the product should be, and factor in the future of the building, the future of the office building next door and how it may be repurposed later,” he said. “I’m worried about how we convince investors we are stepping back and looking at big-picture trends and issues, rather than just assuming behavior will go back to what it was.”