Hotel owners, brokers and lenders share factors they believe are creating uncertainty for hotel transactions.
PHOENIX—Though U.S. hotel owners, brokers and lenders believe there’s still room for further deals, they acknowledged the path forward isn’t as clear as it has been in the past.
During the recent Hotel News Now Lending Roundtable, experts explored factors they believe are adding uncertainty to future hotel deals.
Supply is a big concern, said Rushi Shah, principal and CEO of Aries Conlon Capital. His company looks closely at supply, especially when working with owners or sponsors to refinance projects in markets that are already saturated.
New construction is difficult in almost any market, he said, so unless there’s an established relationship with the developer, most Wall Street banks won’t touch it. It also helps to have a captive demand driver and some signed roomnight guarantees.
As a borrower, Bob Rauch, president and CEO of RAR Hospitality, said his perception of lenders is that while they care about the brand and the market, they care most about the borrower and his or her track record.
“So if you’ve been successful, they will listen to you, whatever your story is,” he said. “If you say, ‘I know there’s new supply; I know that wage growth is there and it’s going to hurt my net income, but here are my plans; here is what I’m going to do with this asset’ … (that’s) going to go a long way.”
Sponsorship and history is what lenders looks for, said GF Management SVP of Development Jeffrey Kolessar. They want to see a one-page document that lays out the deal model, the business plan and historical numbers from the time a property was acquired, he said.
Based on the results of the U.S. presidential election, many believed that the regulatory environment could improve, said Bill DeForrest, president and CEO of Spire Hospitality. But lack of movement on health-care reform is worrisome, because health care represents a large expense.
“I do think that getting these things (health care, tax reform and immigration) cleared up is an important next step for us,” he said. “I don’t think it’s making it more difficult to get things done today, but uncertainty is never good for any business.”
Pace of growth
The industry is currently in a slow-growth environment, said Mark Kallenberger, founding principal at Kallenberger Jones & Company. The old adage is a rising tide raises all boats, he said, but the tide isn’t rising, so the better-equipped boats will manage while the shabby ones suffer.
STR data over the last 20 years show the industry has grown at an average of 2.5% to 2.7%, DeForrest said. Now STR, parent company of Hotel News Now, is projecting slow growth of 2% to 3%, he said, which isn’t terrible, historically speaking.
But it doesn’t look like the industry will grow 2% to 3%, Kallenberger said, based on expectations that occupancy will be flat or down slightly for the year—as well as STR’s revised full-year forecast, which projects a slowdown in revenue per available room growth.
The Trump bump
There was a common perception that the Trump administration was going to be good for business, said Michael Morton, VP of owner relations at Best Western Hotels & Resorts.
“You see the administration and you say, ‘I hope this is going to happen,’ … (but) then it really isn’t going to happen, and it’s going to continue to be status quo,” he said.
Shah said the markets built in and continue to build in a lot of expectations, so if some of those things don’t happen, it could be problematic.