Panelists at this year’s Lodging Conference try to put some context into the current hotel transaction market.
PHOENIX—Owners looking to buy or sell assets at this point in the hotel industry cycle find themselves in a unique situation in which no one is really sure what’s coming next.
Panelists for the “Buy, hold or sell” session at The Lodging Conference offered some guidance on how owners should proceed.
Uncertainty in transactions
It’s no secret the U.S. hotel industry is experiencing an unsettled market right now, said John Sonnier, SVP at Hodges Ward Elliott, a real-estate firm specializing in hotel mergers and acquisitions. But he doesn’t believe the industry is at its peak.
“It’s a different kind of situation we’re in right now than we’ve been in in a while,” he said. “Companies are looking for consolidation as opposed to driving acquisitions as we saw two years ago.”
Private equity is in the market trying to make buys, he said, but there’s a lot of spread between bids and asking prices. There’s a lot of background noise and chatter, and it’s keeping buyers and sellers from concentrating on the fundamentals of business, which “are exceedingly good,” he added.
Speaking from personal experience, Sonnier said deals seem to be taking longer, not including the initial marketing.
“Once a decision is to be made, the contract negotiation process is taking quite a long time,” he said. “Even when the contract is done, sometimes we’re seeing unusual extensions of time requested by the buyers. Some of it has to do with the (property improvement plans) coming from brands.”
Some financial institutions are sending mixed signals, he said, and when lenders want to change terms, it interrupts the closing process.
There are sellers in the market who still believe it’s a good operating environment, so it’s difficult for them to make concessions that might have helped complete the deal, he said. Sellers who anticipated a downturn, he said, might be more ready to move forward.
Data, so far, hasn’t seemed to change anyone’s minds, Sonnier said. Buyers see the industry as being near the end of the ramp and either hitting a plateau or moving into a down cycle, he said, so they are cautious with their purchases. Sellers see the strong fundamentals still and are not motivated to sell unless the capital is there.
Robert Olson, CEO of RD Olson Development, said his company has four hotels under construction and has opened three so far this year. The development process is lengthy, taking two years at minimum and averaging about three to five years, he said, and no one can predict when the next downturn will be.
Anyone who is buying or building a hotel in the near future must be “confident that, one, this product makes sense in this market, and they’re willing to own it through the next downturn,” he said.
Between 2010 and 2014, David Roedel, partner at Roedel Companies, said his company acquired five hotels—three of which were “terrible pieces of property” on great locations. There was a nice flow of hotels for sale into his inbox in August, he said, and they were properties people were not willing to hold through another downturn.
“Now’s a good time to buy if it’s the right price,” he said.
Foreign capital is still coming into the country, Sonnier said, and specifically there’s been a significant influx of Asian capital since 2014. Some of those buys are marquee deals, he said, but it’s starting to become a little more disciplined. Many sources of foreign capital are trying to move their money out of their home countries, he said.
“I don’t expect it to decline,” he said. “I expect it to increase.”