PHOENIX — The level of distressed pricing that hotel investors expected to see during the pandemic hasn't materialized, and hoteliers now must update their expectations.

Jim Chu, executive vice president, global franchise and development, Hyatt Hotels Corp., said during the "Deals: Development, Investment, M&A" panel at the Lodging Conference, when deals are happening, it's been "an adjustment on what the expectation of the return on capital has been. That has changed."

"Everybody was waiting for distressed pricing, which as we all know hasn't really come as a general matter," he said.

Chu said there's also been a return of lending. Very few people, except large institutional buyers, are buying in all cash.

"They need to have some sort of financing in place. That has returned, especially for conversions and existing hotels," he added.

Greg Friedman, managing principal and CEO of Atlanta-based owner and developer Peachtree Hotel Group, said deals are heating up on the equity side.

"The last 15 months, everybody was betting on the fact that ... there would be this huge opportunity to buy. The COVID discount really never came to bear," he said. "Finally, I think on the equity side you're starting to see more and more trades."

There's plenty of motivating factors that are going to drive asset sales during the fourth quarter of this year as well as the first half of 2022, he added.

When asked if future opportunities will lean more toward the debt or equity side, Friedman said Peachtree's success the last 18 months has been on debt, adding financial institutions are still anxious about certain submarkets.

"We've been very active in buying loans from different financial institutions looking to either de-leverage their balance toward lodging or exit the lodging finance business," he said. "I think that [debt] trade is going to continue to exist going into next year."

However, there is also opportunity on the equity side. Peachtree is currently under contract on five different assets.

"Next year ... I think we will probably be more active on buying properties, but I do think the debt side is continuing to be a big focus for us, as well," he said.

Brian Quinn, chief development officer, Sonesta International Hotels Corporation, said his company isn't letting the crisis go to waste and remains active. In December 2020, Sonesta announced an agreement to purchase RLH Corporation for $90 million.

Service Properties Trust, which has an equity stake in Sonesta, has taken a portfolio of assets encumbered with Sonesta branding to the market to sell.

He anticipates once the market continues to heal, more and more assets will come to the market, which will drive conversions and other opportunities.

Allison Reid, chief development officer, Kimpton Hotels and Restaurants, said an issue the hotel industry must deal with is the lack of capital investment going into properties.

"There's a relationship here between lender, operator, owner, [and] whatever that capital is. And the [furniture, fixtures and equipment] reserve requirements in agreements are contractual with your lender and with your management or franchise agreement," she said. "The good news is that during COVID the one thing we all learned is we have to move quickly, we have to work together and we have to be thoughtful of the impact both short term and long term."

The reserves impact the long-term value of assets. If there is no money in the reserves to fix what the client wants but the competitors have that and are spending it, "you're going to lose business," she said.

Tough conversations will be needed. Some hotels simply won't have the money to maintain brand standards, but most will find a way with the lenders, operators and capital to get those reserves back, Reid said.

"Not all hotels are equal. If you have a brand-new hotel, it's probably less of an issue. If you have a hotel that's on the back end of its life, [it's a] big issue," she said. "You're going to have to make a financial decision and keep the emotion out of it."

Friedman said with many hotel owners utilizing FF&E reserves to make payments or cover operating losses, those reserves been fully exhausted.

That is something that Peachtree looks at when making investments on the equity side.

"We have about 70 hotels we operate, and we're very focused on making sure we have enough reserves for upcoming [property-improvement plans] and renovations," he said.

Chu said Hyatt has become more attuned to following data around customer satisfaction.

"We know that the customer scores are probably as low as they've ever been. It's driven by a lot of things. As we look at ways to put [capital expenditures] and money back in and renovate this hotel, it's an expectation that these leisure travelers in high-value markets are wanting and needing," he said.

Though new construction may "be on life support, it is not dead, Reid said.

Her company opened six Kimpton hotels this year, with some being new construction and already in the pipeline. Kimpton just signed two new-construction deals, too, she said.

Reid said there's also been a lot of new money that's entered the hotel industry, such as MetLife's debt fund.

"It's about mitigating risk. Every conversation I have is how can I lower the risk to me personally, for my company, for my lender," she said. "The conversations get real, real fast."

"Builders got to build and lenders have to lend. I don't think you should count us out for new-builds even next year," she added.

Friedman said new-builds that just opened are compelling from a consumer perspective. And those are the assets that are trading at strong valuations.

However, there's no doubt that there are challenges associated with costs and supplies. Peachtree has two dozen projects in its development pipeline now, with seven under construction and another handful that are about to break ground.

"It's super challenging on the debt side. It's hard to leverage much above 55% of costs," he said.

In some markets, there's high demand for new construction, but sometimes it's hard to make the numbers work.

Chu said business is returning to the middle of the country as well as big cities, though there is still a ways to go.

"What's interesting for us is, when we came into this year we knew that we were going to open more hotels this year than ever in the history of Hyatt. Part of it was some [projects] that slid from last year to this year," he said.

But what Hyatt was unsure about was how quickly development would recover. He said Hyatt has had a thorough recovery, but the process isn't speedy and there still is risk.

Friedman said the select-service and extended-stay segments will continue to thrive. And certain markets, such as Texas and Florida, will thrive, too.

"I would pretty much develop any hotel in Austin. That city is going to continue to grow," he said.

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