NEW YORK — Morgan Stanley's Michael Bluhm said there has never before been an environment like this one, where hotel operating metrics are so strong and the debt environment is so weak.
Bluhm, who previously worked with Host Hotels & Resorts and is currently managing director and global head of gaming and lodging for Morgan Stanley Investment Banking, said the hotel industry is facing a "liquidity crisis."
Banks' "ability to lend is becoming much, much smaller," he said, during the "Investment Strategies from Capital's POV" session at the NYU International Hospitality Industry Investment Conference. "The aperture of your lending community is becoming smaller, and as a result you realize it will ultimately impact the economy and slow things down."
The ongoing financing crunch is giving rise to more alternative lenders — a source that tends to be more expensive for borrowers.
Greg Friedman, managing principal and CEO of hotel investment, operations and lending platform Peachtree Hotel Group, said it's "a very challenging market" in terms of debt even though there are still well-capitalized and interested buyers.
"It's questionable if debt is even accretive in a lot of cases, or it's accretive to a certain degree on the buy side, right now," he said. "There's the question of where inflation is going to settle."
That overall economic uncertainty comes from several different directions, Friedman said. These include speculation on what the Federal Reserve will do with interest rates and how the labor environment — which has been the biggest driver of cost increases for hotels — will fare. On top of that, liquidity is likely to remain limited as regional banks face deeper scrutiny.
"Regional banks, national banks, even community banks — all banks are basically trying to conserve liquidity," he said.
That doesn't mean all investors are forced to the sidelines, though. MCR Chairman and CEO Tyler Morse said his company remains an active buyer, picking up roughly a dozen properties in a little more than a month.
Morse said the higher cost of debt will likely "flush out" investors who only thrived because of the low cost to borrow, which leaves more sophisticated owners and operators.
"Any nincompoop can make money in a zero-interest rate environment," he said. "You don't have to be a hotel savant and investing savant to make money when money is free. So, you've got to be able to add value at an asset level."
How you add value is in operations, Morse said, adding that high-end operators will be poised for success going forward.
"It's a very interesting environment," he said. "It's going to be 9% interest rates for the foreseeable future."
Mit Shah, CEO of Noble Investment Group, agreed that creating value for hotels arises from the operating side of the business and investment into the hotel assets, which happens "seemingly on a consistent basis."
In financing deals and development, Noble is doing "two-year swaps or three-year swaps," he said, in the hopes of a more favorable refinancing environment in that time period.
Shah disagreed with the idea that investors must themselves be operators. Noble sold off its hotel operations business more than a decade ago, opting to instead partner with high-quality, third-party managers and focus on active asset management.
He said that shift was largely because becoming a larger operator meant spending more time on things like human resources that took focus away from the investment side of the business.
Getting out of operations has "worked for us in that we can go out and pick the best local operators, and instead of charging ourselves 4%, we pay them 2%," Shah said.