Thanks to the subprime fallout, a construction slowdown, the unsure economic situation and numerous multifamily conversions, roundtable participants like Barry Olson, managing director of Irving, TX-based Archon Capital, say that deal flow and financing have made it more difficult to get lodging deals done.
"It's going to be difficult to repeat the [deal volume] we did in the last three months," Olson said. "I anticipate the flow to be slower now. There won't be many large transactions, given the fact that private equity is probably gone for this year and you won't see big portfolio deals. There will be more off-transactions. I'm seeing a lot of deals that mortgage dealers are putting together."
With the economy and the lending and construction industries slowing, one of the biggest consequences that has befallen the lodging industry is the unpredictability of pricing, according to panelists. This, they say, has led to conservative underwriting.
"Trying to predict what the economy will do is very tough. We still have to worry about shifting currents, a credit crunch, whether or not there will be large-scale layoffs," said Bruce Lowrey, senior vice president of McLean, VA-based Capmark Finance. Being more "conservative," panelists noted, means anything from hesitating on new, high-end luxury projects to thinking twice about construction loans to treading carefully in the volatile fixed-rate loan market.
"We're getting back to the old-time underwriting," said Frederick Van Overbeek, managing director at Prudential Mortgage Capital Co.'s San Francisco office. "You're still finding attractive deals, but the risk-return aspect is shifting back to the core." This means there are fewer value-added deals and a strong sense of credit risk, he added.
Many panelists acknowledged that despite the decline in value-added deals, they do still exist--unlike securitization, which has taken a major hit. In terms of value-added deals, Van Overbeek and other panelists noted that as long as they're weighed on the basis of risk and liquidity potential, as any deal nowadays is, many are turning out fine. "We all need to know the answer to 'where is this economy going?'" Van Overbeek said. "We need to know how to feel about the hospitality and demand aspects of our industry. And we need to take a much more careful look at what works and what doesn't."
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