SAN FRANCISCO — The hotel industry transaction market will continue to be very difficult as long as financing remains scarce and expensive, and the pain is felt most acutely in some urban markets, said Robert Stiles, principal and managing director of RobertDouglas.
Speaking during the "Capital Markets Update" at the Hospitality Asset Managers Association's Spring 2023 Conference, Stiles said Chicago has sadly turned into a poster child for difficulties in lending.
"We're doing some refi work in Chicago right now and a bunch of other cities, and lenders right now are almost putting an 'X' through some downtown markets," he said. "Chicago is really hard to refinance right now. Lenders just have this broadly negative view about Chicago. Maybe investors do, too, but this is about more than product type."
He said there are two things that could "change the market quickly" to open lending back up.
"One is when rates actually start to fall and the Fed actually starts to chop rates," Stiles said. "Look, it's just a question of time, and when that happens, I think the transaction market will turn up sharply because people will be looking forward and it will really help valuations."
The second thing, he said, is if the market turns in the opposite direction and "banks become more ruthless."
He said it's a realistic possibility that some borrowers will be forced to sell by the terms of loan extensions if they're unable to refinance.
Some might have to "pay down their loan by $20 million or sell," he said.
He said the longer the lending environment remains fraught, the more likely it is that real distress hits the markets.
"That's going to be what drives transactions, and you're going to see a change in cap rates," he said.
He noted there are two groups of active investors, the first of which are family offices "focused on luxury product."
"A lot of it is resort oriented," Stiles said. "These are super high-net-worth family offices."
The other is investment groups focused in on "new-generation, extended-stay and premium select-service" hotels.
"The cap rates on those assets really haven't moved for the new-gen stuff," he said. "I kind of put a smiley face after that for assets that are available unencumbered by management. The reason for the smiley face is for a seller, it's a wonderful conflict of interest because the management company brings in a capital source. The management company has done the pro forma describing the pricing on the deal, and ultimately whether they perform at that level or not, they still get a massive contract transaction. So as a seller — when we're working on a seller's behalf — we love to have a management company bidding on a deal because they're doing the work of convincing the capital that they can do a much better job than the boneheads who were managing the property."