It appears that the hotel industry has at least bottomed and lately has seen rising revenues in many markets. Values are down 40%-50% from the 2007 peak and they have barely begun to rise yet. The decline of 19% peak to trough of Revpar was the worst in history of the US. In short, it appears we are at the bottom of the worst downturn hotels has ever experienced and it is the right time to be getting back in so long as you understand this is not a quick hit, but a 4-5 year cycle play.
Unlike office and retail, which are still suffering space reductions by major tenants and rent reductions which will last several years due to the longer leases, hotels can turn on a dime, good or bad. If you believe that this is the bottom, or even close to it, then hotels offer a better return than office or retail, and residential over the near term. The investors who will harvest high returns, are those who team up with top quality highly experienced managers, who have the cash to fund PIPs-renovations. The brands have been allowing owners to defer the property improvement plan requirements for the past two years, and it will be those who have the cash now to upgrade their properties, who will reap the biggest rewards over the next several years.
Many owners have depleted the FF&E reserve just to pay debt service, and they are not able to replenish it even with a loan modification because NOI is still not nearly at a level which allows sufficient cash to be set aside. As the economy recovers and as hotel occupancy improves, it will be the renovated properties and those bought at discounts that win the competitive battle. If you buy a hotel at a lower cost than the owner down the road paid in 06-or 07 to build or buy his hotel, and you have the cash to do the PIP, then you can attract the guests and charge competitive rates to the nearby hotel which is saddled with the high leverage loan and unable to do the PIP
Multi-family may be recovering, but for most assets, it does not have the potential of .the level of returns which are possible with hotels coming off of the historic declines they have suffered.
The key with hotels is to remember they are really an operating business and it is essential to only invest with operators who have developed, owned, operated and sold hotels successfully for many years. Just because a company manages some hotels, does not make them as good at buying and owning and financing as you need them to be. There is a real difference between putting your own cash at stake as a partner/operator, and doing fee only management. There is also a big difference between having negotiated acquisitions for your own account and just coming in as a manager after the asset is acquired.
Pick your operator partner very carefully, don’t choose hotels that need major renovation or major repositioning, and don’t bid for major assets in major cities, nor major resorts. The risk adjusted returns in hotels have been shown over time to be better in secondary cities and near in suburbs, than they are for major urban assets or major resorts. If you want solid, low risk returns and very good longer term capital gains, stay with mid market assets in secondary cities. If you want to swing for the fence with much higher risk, buy a major resort or major urban assets.
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Joel Ross
Joel Ross began his career in Wall St as an investment banker in 1965, handling corporate advisory matters for a variety of clients. During the seventies he was CEO of North American operations for a UK based conglomerate, and sat on the parent company board. In 1981, he began his own firm handling leveraged buyouts, investment banking and real estate financing. In 1984 Ross began providing investment banking services and arranging financing for real estate transactions with his own firm, Ross Properties, Inc. In 1993 Ross and a partner, Lexington Mortgage, created the first Wall St hotel CMBS program in conjunction with Nomura. They went on to develop a similar CMBS program for another major Wall St investment bank and for five leading hotel companies. Lexington, in partnership with Mr. Ross established a hotel mortgage bank table funded by an investment bank, and making all CMBS hotel loans on their behalf. In 1999 he formed Citadel Realty Advisors as a successor to Ross Properties Corp., focusing on real estate investment banking in the US, UK and Paris. He has closed over $3.0 billion of financings for office, hotel, retail, land and multifamily projects. Ross is also a founder of Market Street Investors, a brownfield land development company, and has been involved in the acquisition of notes on defaulted loans and various REO assets in conjunction with several major investors. Ross was an adjunct professor in the graduate program at the NYU Hotel School. He is a member of Urban Land Institute and was a member of the leadership of his ULI council. In 1999, he conceived and co-authored with PricewaterhouseCoopers, the Hotel Mortgage Performance Report, a major study of hotel mortgage default rates.
