DALLAS — While the traditional thinking about investing in a volatile real estate asset class like hotels would lead many to believe a recession could drive down interest, hotel executives said there is so much private equity capital sitting on the sidelines that deals will continue unabated.
Speaking at the 2022 ALIS Summer Update event in Dallas, Ashford Hospitality Trust President and CEO Rob Hays said plenty of investors are lying in wait to deploy capital.
"I think there's a ton of private capital, and I think they're all going to sit and wait for spread to come back in," Hays said during the "Views from the Boardroom" session. "And when they do, it's going to be aggressive."
Hays said fellow real estate investment trusts focused in the hotel segment could be among the top targets.
"I think you're going to see probably at least three of my peer hotel REITs go private in the next 24 months because there's too much money out there," he said. "And what private equity funds don't do is hand back money to their LPs."
Mehul Patel, managing partner and CEO of NewcrestImage, agreed that investment will continue even on the development side. He said it doesn't make sense to wait to build hotels if you have the capital ready to do so right now.
"In my opinion, costs will continue to go up," he said. "That's the history. Go look at the 30-year history. Costs have never gone down. Labor will never go down. This is the new norm now on construction and labor."
The problem for many hotel investors right now is finding the financing for those projects, but Patel said that's less of an issue for established sponsors with long-term relationships with their lenders.
"The capital will always be there based on your track record," he said.
How developers approach a project also has a big impact on the availability of financing, Patel said.
"It's about strategy," he said. "If you're saying, 'I want to stay in the business and build it for myself and keep it,' fine. Go with a 40% down payment, and no lender will turn you down."
Both Omni Hotels & Resorts Chairman Peter Strebel and Virgin Hotels CEO James Bermingham said their companies will continue to operate essentially as family offices and will continue to sink capital into the industry in order to fuel growth for their respective brands.
"We reinvest every dollar we make in the business," Strebel said. "So we're not being consumers of capital, but there is a lot of money out there."
He added Omni hasn't done as many deals in the wake of the pandemic as he once thought it would, though.
"Our coffers were pretty full, so we thought we could come up with some pretty good acquisitions, but the pricing was just out of control," Strebel said.
Bermingham's perspective was similar. He said it takes "additional discipline" in underwriting to find the right deals with the current, elevated pricing. But there will be opportunity soon, though.
"I think you're definitely going to see more distressed assets, but it's going to be more specific," he said, adding there might be some opportunities in European markets where Virgin is looking to grow.
One thing that does prevent a major risk to the hotel industry and investment within it is local and state level regulations that add significant costs, panelists said.
Laura Lee Blake, president and CEO of AAHOA, pointed to new rules in Los Angeles that require hotels to offer daily housekeeping and restrict how many rooms housekeepers can clean on a daily basis. The new rules also require hotels to employ a dedicated security guard.
"In today's world, especially for a lot of our AAHOA members that might have economy and midscale brands, to incur the additional costs of daily housekeeping when guests don't necessarily even want it, that is a concern," she said.
Hays said the new rules in Los Angeles are already having a big impact on his company, with a Marriott property in Beverly Hills now losing between $750,000 to $1 million in net operating income.
"So it's a big, big number," he said.
Hays said how cities regulate the hotel industry is becoming an increasingly big part of investment strategy.
"On the heels of COVID, you're underwriting deals with municipality risk in a way you never did before," Hays said.