IREFAC: Investment outlook mostly positive
IREFAC: Investment outlook mostly positive
30 JANUARY 2017 9:31 AM

Members of the Industry Real Estate Financing Advisory Council expect the flow of international currency and investment to have an effect on a relatively strong 2017.

LOS ANGELES—A lot of people are wondering when the hotel industry is going to hit the end of its current, but according to some, that moment might have already passed unnoticed.

“I think we’re in a new reality, and we’re in a new cycle,” said Mark Elliott, president of Hodges Ward Elliott, during the Industry Real Estate Financing Advisory Council panel on the final day of the 2017 Americas Lodging Investment Summit. “I think the ninth inning was in 2016.”

Even those on the panel who believe the end hasn’t arrived yet aren’t expecting an apocalyptic drop-off. That’s in large part because of several positive economic signs that have recently popped up.

“It’s going to be interesting,” said Mike Shannon, chairman of KSL Capital Partners. “I think you’re going to see a reignition of inflation, and we’ll see higher interest rates. It will be a race to see which one affects value more.”

Shannon said he’s “generally an optimist” when it comes to his expectations for the next couple of years, but he wouldn’t commit to any specific numbers for gross domestic product growth, even as moderators suggested that 3% might be a reasonable guess in 2017.

“If you had all the economists in a circle, they’d all be pointing in a different direction,” he said. “I don’t think anybody really knows, but I think in general to get out of this worldwide debt crisis you need growth.”

He said one possible source of pessimism is a likely increase to the cost of internationally sourced goods as more countries take a nationalist bent and scale back on trade.

Jacques Brand, partner with PJT Partners, pointed to the administration of President Donald Trump as a source of the business community’s newfound optimism in the U.S.

“We’ll have an administration that is friendly to business,” he said. “And that will manifest itself in deregulating a variety of markets … spending on infrastructure and a very different tax regime, which is all very good for corporates.”

He said he ultimately expects an increase in consumer spending and corporate travel. Brand projected that GDP will grow between 2.5% and 2.7%.

Michael Murphy, head of lodging and leisure capital markets at First Fidelity Companies, said investors should take solace in the fact that financing will be available in 2017.

“It’s gotten a little tougher, but for good projects, guys are paid to get money out,” he said. “If you’re dealing with the right capital sources, those guys are not paid to hang on to the money.”

The state of Chinese investment
It seems to be getting harder for Chinese investors to get their money out of their home country and to American shores, panelists said. But the panelists noted this isn’t the first time something like that has happened, and generally, smart money finds a way.

Elliott said this is something he has personal experience with. He has noticed a pattern of Chinese regulatory crackdowns on outside investment, he said, and businesses pioneering new ways to get what they want. However, that doesn’t mean it isn’t something that keeps him up at night when it impacts his business.

He said he is working on a deal involving Chinese capital, and the ability to get money to the U.S. is a common point of discussion.

“That’s what we ask every time we talk, ‘Can you actually get your money out?’” he said. “And they say, ‘oh, no problem.’”

Impacts of currency
The impact of a strong U.S. dollar and the fluctuations of other prominent international currencies has been a hot topic within the industry lately, and Shannon noted this is largely due to the fact values have been shifting much more quickly than in the past.

“Relationships that changed very little on a yearly basis are now changing rapidly because of political uncertainty,” he said.

Elliott said he thinks sometimes the impacts of a strong dollar are a bit overblown, but he doesn’t think that’s the case with international investment.

“As the dollar strengthens, some people might say America has gotten too expensive, and others might decide to jump in before (the dollar) continues to grow,” he said.

Anthony Capuano, EVP and global chief development officer for Marriott International, said despite strong investor sentiment for the U.S., his company is still seeing significant global growth following the acquisition of Starwood Hotels & Resorts Worldwide.

“We’re three years running for record deals volume across Europe,” he said.

Where the smart investors are putting their money
Unsurprisingly, Shannon said KSL is focused largely on the all-inclusive sector as an investment opportunity, after the recently announced deal to buy Apple Leisure Group.

But Elliott said he’s seeing a shift in his company’s investment strategy from focusing on gateway markets, to looking to more at secondary markets, where performance is strong and assets are more reasonably priced.

“We had a mindset for the last decade that you needed to be in gateway cities and coasts until the last 18 months,” he said. “Then in December, the top 25 markets were up 1.9% RevPAR while the rest of the country is up 4.2%. So, all of a sudden people realized there’s a whole lot of America and a whole lot of business going on that’s not gateway cities.”

Brand noted that real estate investment trusts have once again become attractive investment targets, particularly the larger lodging REITS like Host Hotels & Resorts and Park Hotels & Resorts, which recently spun off from Hilton Worldwide Holdings.

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