NEW YORK CITY-Investors and analysts sounded an optimistic take on the industry—present and future—with just a hint of caution during the NYU Hospitality Investment conference earlier this week.
“The capital markets have been extremely strong and kind to the real estate sector, especially hotels,” said A. Drew Goldman, managing director and global co-head, real estate investment banking, Deutsche Bank Securities. “The debt market has only gotten stronger for the past 69 months. Banks and CMBS have seen unprecedented activity, which has fueled the mergers and acquisitions market, and equity.” Players in the hotel sector, he forecasted, “will continue to see good times.”
Added Asad Kazim, managing director, real estate, lodging and leisure group at UBS Investment Bank, “One thing that's helping is inflation coming back. This sector benefits tremendously from inflation on the top-line, so we will continue to see fund flows and value progression in the public market.”
Some buyers are enamored of the industry on the whole, rather than even narrowing down their interest to a particular market. “We're in the middle of the cycle so I think we're hitting on all cylinders,” said Paul Whyte, managing director and global co-head of real estate investment banking, Credit Suisse Securities USA. He added though, “Resorts haven't recovered like city properties because group business is the last to come back.”
Goldman singled out some markets. “All the major REITS are focused on the top 25 MSAs. Certainly anything coastal seems positive, and we're starting to see recovery in the Southeast. I like limited and select service; I think it's more interesting.”
The industry watchers discussed other types of financing. “The CMBS market is open,” said Goldman. “You can do a mortgage as well as mezzanine financing for 70-80% of a deal.” Added Whyte, “the CMBS market is open for life companies. They're looking for high quality, trophy assets.”
Noted Douglas Kessler, president, Ashford Hospitality Trust, “Recently we went out to finance something and there were about 60 confidentiality agreements signed, about 30 [of those parties] said they would bid and close to 20 did.
"Compare that to two years ago," he said, "There are attractive spreads to lenders on a hotel versus a multifamily asset, and I'm not convinced the risk is any different. It's an attractive debt market, groups are expanding in scope the assets that they want to finance.”
Investors are interested in multiple markets, note several private equity experts. “The big cities yields have gone to historical levels,” says Richard Gomel, partner Junius Real Estate Partners, which is an investment platform for JP Morgan Chase. “We've been looking at some secondary markets, where we're seeing cap rate spreads of 200-400 basis points. Your cash-on-cash returns there are particularly compelling.”
Agreed Suril Shah, SVP, Starwood Capital Group, “We've dipped below the top 25 MSAs and have gone into secondary markets because of the cap rate spreads. We're trying to buy the entire country and not focus on one market. Have bought select service in 70 markets.”
There are ways to guild the lily too, industry players and observers noted. “I think there are still opportunities in major markets when assets are repositioned,” said Gomel. Added industry attorney Gary Axelrod, partner, Latham & Watkins, “If you have an opportunity to change brands, you're really going to drive value.”
So what type of deal would make buyers sit up and take notice?
“It should be $30 to 60 million of some kind of investment, whether equity, preferred equity or debt,” said Gomel. “We have some flexibility on return. We would look at a renovation loan, for example, if it was priced right, and we're looking at assets that are broken or needing a capitalization. We wouldn't look at anything below a nine or 10.”
Added Shah, “Our parameters are similar, just bigger. I think $50 million of equity is the minimum but generally [we do] $100 million or larger.”
Want to continue reading?
Become a Free ALM Digital Reader.
Once you are an ALM Digital Member, you’ll receive:
- Breaking commercial real estate news and analysis, on-site and via our newsletters and custom alerts
- Educational webcasts, white papers, and ebooks from industry thought leaders
- Critical coverage of the property casualty insurance and financial advisory markets on our other ALM sites, PropertyCasualty360 and ThinkAdvisor
Already have an account? Sign In Now
*May exclude premium content© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
Rayna Katz
Rayna Katz is a seasoned business journalist whose extensive experience includes coverage of the lodging sector, travel and the culinary space. She was most recently content director for a business-to-business publisher, overseeing four publications. While at Meeting News, a travel trade publication, she received a Best Reporting award for a story on meeting cancellations in New Orleans during Hurricane Katrina.
