CHICAGO — After a prolonged period of historically low interest rates, the math is suddenly getting more difficult for hotel investors.
Speaking during the "Transaction, Economic, Debt and Capital Market Update" session at the 2022 fall conference of the Hospitality Asset Managers Association, Mark Schoenholtz, vice chairman and co-head of lodging for Newmark, said high interest rates, operating costs and expectations for renovations from brand partners are all hitting owners at the same time.
"Owners are facing some tough choices coming up in terms of putting capital into properties versus what does the refinancing market look like today and what's the borrowing cost," he said.
The silver lining is that top markets across the U.S. have largely been sidelined during the lodging recovery and have the most room for improvement, he said.
"In some ways, the New Yorks of the world, the San Franciscos, the Los Angeleses, The Bostons, the Phillys ... have a lot more room to run in terms of the recovery versus some of these resort markets," he said. "We are starting to see investors look at those particular assets over the near term because they believe they have better growth prospects."
Kevin Mallory, senior managing director and head of hotels in the Americas for CBRE, said transactions have been — and likely will continue to be — slower to materialize in some of those large markets, though.
"San Francisco didn't see a trade until the end of 2021 or maybe the beginning of 2022," he said.
Mallory noted there have been several examples of hotels selling at discounts to 2019 values in New York through the course of the pandemic.
Regardless of where investors are looking to do deals, financing is going to remain the challenging part.
Schoenholtz said it's not just a matter of cost but also availability.
"This is a time you would think every lender would want to put out capital given where rates are on a relative basis," he said. "When I was talking to the folks at Wells Fargo and their hospitality group, they'd love to put out new money. They are just limited in the size of their overall pool, and the thing that is hurting them is they are not seeing maturities being repaid."
He said currently insurance companies are a better source of debt than the large banks.
"MetLife just told me they're putting out some money," he said. "I think it's going to be on a case-by-case basis."
All of this could culminate in the wave of distress many investors have been waiting for since the onset of the COVID-19 pandemic, although in a much more mild form.
"There are certain assets that lenders have that the equity is still trying to hold on, but the lender is saying, 'Listen, reserves are gone, I have a [property-improvement plan], and if you're not going to put that money in, I could get repaid. I know you may not make everything that you thought you were going to make, but you're still going to do OK, so let's put this on the market,'" Schoenholtz said.
He said many owners simply don't understand how expensive debt is at the moment, and it's only going to get more expensive as the Federal Reserve continues to raise interest rates.
"When we tell people your debt is going to cost you 7% if you're going to try to refinance, they tell us we're absolutely out of our minds," he said. "Then they go out and say, 'You know, we talked to a couple of lenders, and you're right. Now, we've got a real problem.'"