Panelists during a transactions session at the Hotel Data Conference talk about the difficulties and opportunities for hotel deals.
NASHVILLE, Tennessee—Transactions pace is down in 2016 is down compared to 2015, which shouldn’t surprise many considering the records broken and set last year, but panelists at this year’s Hotel Data Conference believe the second half of the year still holds some promise despite a slowing cycle.
During the “Transactions pulse” session, panelists shared their perspectives on hotel deals this year and what’s possibly to come.
“It’s just a different world,” said Mary Beth Cutshall, SVP of acquisitions and business development at Hospitality Ventures Management Group. “We’re seeing ’16 turning to be a crossing of the axis wheel. … You can perhaps pick up a deal still, but you have to be patient about it. This year is very different from last year. I think our little trend tells a lot about what’s going on from a transactional perspective.”
Debt is more difficult to obtain in secondary and tertiary markets than in key gateway cities, said Rob Stiles, principal and managing director at RobertDouglas, and commercial mortgage-backed securities are harder as well. There was about $101 billion in total origination of CMBSes in 2015, he said, and this year it’s going to be about $50 billion to $70 billion. Most of that is going to be in secondary markets, he said, and it was a major source of financing for boutique hotels.
There has been talk about the CMBS bubble coming due in 2015 and 2016, he said, but it’s not had as big an impact on the market as it has been seen generally.
“Part of the reason is those holders of bonds, when it sells, when it comes to term, they need to invest that money somewhere else,” he said. “A lot of times it’s back in real estate debt.”
Rates are still low, historically speaking, and Stiles said that’s good news. Lenders are focused on the borrower, and if lenders have worked with them before, things are easier and cheaper. The lenders want to know about brand, location and, if it’s an existing asset, its in-place cash flow.
It is harder to finance in secondary markets, said Russell Shattan, SVP of acquisitions and development at MCR Development. When borrowing from community banks, he said, it’s a matter of educating them and committing to building a relationship to earn the banks’ trust.
“With enough relationship building and handholding, you can get there,” he said.
Smaller banks tend to have a footprint where they’re comfortable, he said. Back in 2013, a bank in Rhode Island might agree to lend to a project outside of the state in New York, New Jersey or Pennsylvania if the borrower has a good relationship with the bank. In 2016, if a company is trying to buy a hotel in New Mexico, it will need to find a bank in New Mexico.
The region is the first filter for a lender, he said, and if the bank doesn’t like the market or state, it doesn’t go much further. The next question is brand.
“God help you if you say something other than Marriott or Hilton,” he said.
While the bank officials might be familiar with some of the major companies behind the brands, the bank officials might be reluctant, especially if it’s a newer brand and there isn’t a lot of data on it.
There are no major buyers out there right now, Shattan said. Private real estate investment trusts had been some of the big players before, he said, but they’re not now, which will dampen large portfolio transactions.
The Blackstone Group’s new nontraded REIT will invest in a variety of real estate products, he said, but while Blackstone has always been one of the most active hospitality buyers, he doesn’t think hotels will be the primary focus of the new REIT.
Stiles quickly pointed out Blackstone doesn’t do anything small, adding that it’s raising $5 billion, an estimated 25% of which could go toward hotels.
Select-service hotels bring a lot of opportunity, Cutshall said, and there’s a lot of foreign capital coming in looking for yield. Foreign buyers, such as those from Dubai, United Arab Emirates and China, have a lot of global concerns and feel the U.S. is a safe haven for their money.
Responding to a question about Brexit, Shattan said he’s glad the vote turned out how it did. While the vote was scary, he said, it reaffirmed America’s stability and shows that global cash flows around the world go someplace.
“In that relative game, the U.S. came out pretty clean,” he said. “The dollar strengthened. Lots of global cash flows are coming to the U.S.”