It’s a strange time to be buying and selling hotels.
Looking broadly at the marketplace, major leisure destinations are active and booming. Hotels may not always be operating at capacity, but operators have seen a 2.3% rate increase in June year-over-year, boding well for the industry's health in the long term. However, today’s high cost of capital, mixed with ongoing uncertainty and inconsistent bookings in secondary and tertiary markets due to high rates, have put a damper on lenders’ willingness to embrace the big deals which have historically defined hospitality asset management.
Just take it from LW Hospitality Advisors, whose recent survey showed a 36% decrease in hotel transactions valued at $10 million or higher. With so many hotels on the market today, more sellers are confronting the fact that they may not find suitors in the near future. However, existing hotels still represent a better value proposition today for many investors when compared to ground-up construction for two key reasons:
- Construction costs remain unpredictable. Supply chain issues remain, left over from confusion during the pandemic, particularly for new projects from within the past two years. Additionally, labor costs have increased, and combined with unforeseen delays, it has become easier for investors to go over budget.
- Today’s interest rate environment remains unfavorable for many investors. Transactions and development have become more difficult to finance, with many market leaders unable to embrace the majority of industry forecasts due to a lack of reliable historical data.
These trends have priced out a significant portion of the hotel development marketplace — or forced them to get more creative with their deal-making. Lenders today believe in the performance of midscale hotels, particularly if they are attached to a reliable brand. However, the biggest factor hospitality investors must consider today is the impact of expensive debt on their bottom line.
Paying the Cost
Expensive debt is a barrier the hotel industry has not been confronted with for several years. Debt leveraged at 3-4% can now be as high as 8-10%. This is a material difference, and for most investors, it changes the scope of any potential deals. This is in addition to higher rates against a backdrop of lower occupancy. Hoteliers are looking for shifts in economic headwinds to benefit consumers and drive travel, and they just haven’t seen any indication of them yet.
Times like these call for creative solutions. Some investors have taken a unique approach to researching deals whereby they almost reverse-engineer transactions. With such a large volume of hotels available for sale, investors can start the process by shopping for a property that fits their goals. Once they find one within their budget, they can bring this property to the marketplace in search of debt and equity to cover the remaining investment costs.
Today’s marketplace may seem restrictive, but it’s also more respectful of deals with a high probability of closing. If investors come prepared with the right research and a solid plan, the money can chase down deals today. Buyers can also leverage the return of profitable trends to seal deals, such as the resurgence of the restaurant industry and the need for fresh concepts across hospitality.
In light of the high cost of debt, everyone in the investment community must pick their shots more carefully. Buyers should ask themselves, “What is the best deal that fits my box?” Then look at potential acquisitions and identify a fit based on what is happening today, not what might happen tomorrow.
These are just a few of the ways buyers can iron out some of the risks of hotel asset shopping in an environment with such a high cost of debt. Rising costs come with the ability to take fewer risks, and it pays to be detail-oriented in a marketplace like we have now. However, if you have the right plan and the will to execute, the money is listening.
Bob Habeeb is founder and CEO of Maverick Hotels and Restaurants.
The opinions expressed in this column do not necessarily reflect the opinions of Hotel News Now or CoStar Group and its affiliated companies. Bloggers published on this site are given the freedom to express views that may be controversial, but our goal is to provoke thought and constructive discussion within our reader community. Please feel free to contact an editor with any questions or concern.