The pace of hotel transactions has stalled in the coronavirus crisis. Financed deals that were underway at the time have continued to move forward, but transactions in any other phase of the process are either on hold or are proceeding with caution, say experts.
“If you have your property already listed, there’s probably not a whole lot of downside to letting the process proceed, but there really is no process at this point.” Daniel Lesser, LW Hospitality Advisors
The COVID-19 pandemic is impacting the hotel industry in different ways. When the World Health Organization declared the new coronavirus a global pandemic on March 11 and President Trump declared a national state of emergency two days later, the pace of hotel transactions quickly slowed.
Financed deals that were underway at the time have continued to move forward, but transactions in any other phase of the process are on hold or are proceeding with caution, say experts.
“If you have your property already listed, there’s probably not a whole lot of downside to letting the process proceed, but there really is no process at this point,” Lesser said.
“The capital markets for hotel financing are shut down – unless there are buyers out there who are willing to pay all cash. But that begs the question do they want to pay market value or liquidation value? There’s a big difference. Market value is predicated upon the definition of willing buyer, willing seller neither acting under duress. If financing is not available then that clearly is a distress factor.”
LISTEN: Episode 246 of Lodging Leaders podcast featured Daniel Lesser of LW Hospitality Advisors among sources in a report on the outlook of hotel transaction volume in 2020. At the time, the new coronavirus was spreading in China, but had not yet reached the U.S.
Part of the buying due diligence is spending time at a hotel to study how it does business. Most buyers believe they can enhance and improve a property’s business performance, Lesser said. But with many hotels closed, doing little business or being used for alternative purposes such as health care, due diligence is on hold.
Hotel owners are facing tremendous business challenges. As a result, buyers and sellers have realigned their expectations.
Here are a few trends Marcus & Millichap see taking shape:
LISTEN: Lodging Leaders podcast Episode 260 examines the stunning “free fall” of hotel business performance just two weeks after the coronavirus is declared a pandemic and the U.S. goes into a state of emergency.
Hotel investments continue to offer a substantial premium relative to government bonds, especially given the recent decline in U.S. Treasury yields to historical lows, said Marcus & Millichap in a recent report. The 10-year Treasury in March broke below the 1 percent threshold for the first time. Meanwhile, the average cap rate on recent hotel trades remains above 8 percent. (Graphic: Marcus & Millichap)
Carter Willcox, a sales associate with Mumford Company, said prices that have expanded out of reach for some investors over the past few years are aligning with the new reality. The spread between the owner’s ask and what an investor is willing to pay might be narrowing.
While owners should not consider an unadvised change in their listing price, the business crisis is influencing the perceived value owners had of their asset before the coronavirus pandemic.
“Owners who currently have hotels listed who are eager to sell are taking second looks at offers that we had on the table say, a month ago, that may have been fair but below what they wanted to accept at that time,” Willcox said.
“There’s always been a slight disconnect between what the current owner and seller of the property would like to get and what a buyer would like to pay. We make sure every property we bring to market has a list price based on underlying fundamentals and historical operating statistics.”
The chart featured in a report by Marcus & Millichap shows the changing composition of hotel investors of $2.5 million and higher over the past six years. “Many institutions are slowing their activity to await further information, lessening the competition for listings among private buyers who may be able to pursue previously unavailable opportunities,” said the report. (Graphic: Marcus & Millichap)
Willcox agrees that hotel deals with financing in place before the coronavirus crisis, are going to close. In most other cases, prospective sellers and buyers are cautious.
“In terms of listings, we’re seeing high levels of caution,” he said. “Current owners of hotels listed for sale are more concerned with regaining stable operations than selling. But that doesn’t mean they’re not interested if the right offer comes along on a property they’ve already got listed.”
In its report, Marcus & Millichap notes, “While rapidly changing circumstances encourage vigilance, buyers and sellers should also be looking to the horizon.
“Ultimately, a hotel investment is a multiyear endeavor. The hospitality sector is highly resistant and has recovered from downturns in the past. The 2008 financial crisis birthed the most prosperous decade of hotel performance in recent memory, and there are no signs that suggest the sector will not also rebound once the current threat abates.”
Once the crisis eases, investment opportunities might become more democratic and attainable for would-be investors who were shut out of the market by high prices, Willcox said.
“Since 2017, especially in the economy and independent properties we’ve seen large increases in average sale price and average price-per-room metrics,” he said.
The rising prices were good for sellers as they “translated to big premiums,” especially on lower-priced properties, Willcox said. But they “created a tough market for first-time buyers and owners of one to two maybe three properties who are looking to increase the value of their portfolios.”
AT A GLANCE
Here are some updates regarding the impact the new coronavirus outbreak in the U.S. Long Live Lodging will continue to update this chart as well as other information as part of its Special Report on Coronavirus and the U.S. Hotel Industry.
Lodging Econometrics has tracked the hotel industry since 1998. Its global database includes new-hotel pipelines as well as renovations and brand conversions. Hotel franchisers once eager to launch new brands are focused on converting existing hotels because it’s a faster way to recover revenue lost to the COVID-19 pandemic than through new construction. In Episode 346, Lodging Leaders explores the increasing number of conversions in the U.S. hotel industry and what owners and operators need to consider before repositioning an asset.
In the first few months of the COVID-19 pandemic in the U.S., financiers anticipated a swell of distressed hotel businesses. Some raised rescue funds to respond to what they thought was a pending crisis. Though there are financial rescues taking place, the level of such activity is far below what industry advisers and fund managers expected. Commercial real estate investors positioned to act in the early days of the pandemic held off and are now just beginning to unleash their cash hoards totaling billions of dollars. Episode 345 of Lodging Leaders podcast explores the state of capital investment in the hotel industry.