PHOENIX — The U.S. hotel deals environment is lining up for gradual, steady increases over the next several years, hotel brokers said.
During a meeting of the Lodging Industry Investment Council during the Lodging Conference, Mike Cahill, founder and CEO of Hospitality Real Estate Counselors, said his brokerage has seen closed deals increase by about 30% year over year. The deals have been consistent within regions, with some up and some down. The company’s brokers in the Midwest have been busy, and buyers and sellers have been able to reach agreements on pricing.
“They’re moving stuff. They’re recycling capital,” he said.
Florida saw a great deal of interest during and after the pandemic, where a hotel with a view of the beach would sell within months. That activity is now much slower, he said. California is similarly slow.
Overall, barring a black swan event, Cahill said he expects a good four- to five-year ride, with transactions increasing about 10% a year.
The dealmakers
The ones making the deals are the owner-operators who are making deals in the $10 million to $20 million segment, Cahill said, calling them “non-digital buyers.” The sellers, particularly the larger institutional owners, often say they don’t recognize the buyer as they don’t have a website or other online presence. These buyers are wealthy, though, and ready to make deals.
“They’re under the radar, and you’ve got to really walk into them,” he said. “A lot of them are first- or second-time hotel buyers. We’re getting guys who say, ‘Hey, listen, I just sold my car dealership. I just sold my chain of Jiffy Lubes, and I was at a party and my buddy said hotels are a great investment.’”
The deal values in mid-market trades fit within the scope of the Small Business Administration, he said. These $10 million to $20 million deals have an easier time getting financed. People can still use family office and friends of family money.
“It’s a different group of buyers that are fueling this underground type of transaction market,” he said.
As for how much upcoming debt maturities will play a role in hotel deals next year, HREC’s barometer is the broker opinion of values requests from special servicers, Cahill said. He went through these requests from 2019 and 2020 and found the company did 223 broker opinion of values for special servicers.
“A fraction of those resulted in actual listings,” he said. “They worked it out.”
The bigger concern at the time was the office portfolios, he said. They wanted to work out the hotel loans so the lenders didn’t have to take ownership of the properties.
The broker opinion values HREC is doing are for owners-operators, he said. They’ve accepted where the pricing is and they want to redeploy capital. They have partners who don’t want to invest further in the property. They may not fit in the direction the management company is heading. They may have refinanced twice already. The investors are ready to move and redeploy capital for a better internal rate of return than leaving it stuck in these hotels.
The lending environment
The small banks are more active now than they were six months ago, said Gregory Porter, managing director at HREC. It starts at the top with the big banks, and his best indicator is that Wells Fargo believes its asset cap will be lifted, and the bank is acting like it.
“They’re turning the spigot on more now,” he said, adding that much of it is still securitized, so it’s not all balance sheet deals. “But when the big banks start to do that, then it starts to trickle down to the regionals and the small banks.”
The non-bank lenders, particularly those involved in commercial mortgage-backed securities, have been rocking, he said. The bankers were reeling because of their balance sheet issues, but that’s water under the bridge now. The banks will be more active, and it will become a more normalized market.
The non-bank bridge lenders won’t go away, he said. More are entering the market, and the trend on the debt side is positive. The debt side moves faster than equity, but equity will catch up.
The loan spreads over base rate will come down to the appetite of the bond buyers, such as pension funds and institutions, he said. Bond appetite has been good, and there’s room for spreads to come in. There would need to be a major event to blow out spreads any further than they are now.
One thing that has been rippling through the market is the B-piece buyers in CMBS are done for the year, Porter said. They’ve taken all the risk they want, and he said he hopes it’s just a seasonal thing. To have a healthy CMBS market, there needs to be multiple buyers competing with each other.
There’s been some pullback on the edges, but generally above the B-piece, the appetite is good and CMBS volume has been way up this year, he said.