Originally published in AAHOA Lodging Business, January 2009

SOutheast Regional Hotel Update

A snapshot of investment and development trends.
Interviews by Dan Marcec

Moving into 2009, it’s important to gauge the state of the hospitality market on the whole so that owners, operators, investors and developers can gain important insight from industry experts and advisors. With this in mind, throughout this year AAHOA Lodging Business will break down the U.S. hospitality market by regions, starting with the Southeast.
     Anthony Falor, chief operating officer of Hodges Ward Elliott in Atlanta; Jaimin Patel, senior associate in the Marcus & Millichap National Hospitality Group in Tampa, Fla.; and Teague Hunter, president, and John Ritger, analyst — both of Hunter Hotels in Atlanta — contributed to the first installment of this feature.

ALB: What trends are most prominent in the investment and development markets in the Southeast?

Falor: Up until May, you could get a $15 million deal. Then the $7 million and $8 million deals were done until late August. And then you saw the deals still getting done in the $3 million range until October, and it’s been a challenge to get any deals more than that done. We had a 20 percent reduction of $10 million deals and under until August, and now we’ve had a 60 percent reduction between August and now in that regard. On the transaction side in the Southeast, Atlanta of all markets in the country has been the hardest hit; there’s been a 25 percent occupancy and/or RevPAR decline since October.

Patel: Most of the transactions we’ve seen in the last 6 months have been either related to franchise pressure for renovation or upgrading to new standards they roll out, or to loan distress for hotel owners that have one or two properties in bad shape that cause a trickle effect on all of them.
     Deals are being done by decent buyers that have a good amount of equity and a very strong relationship with local lenders. Lenders now are very selective to whom they’re lending the money.
     The next wave of properties coming on the market we see right now is a lot of these larger hotels, big 500-unit plus with convention space that for some reason are not making it.

Hunter: Everyone wants to maximize value right now, but the good news is that no one is saying “dump it, we need cash.” We’re not in panic mode yet, but we might have to hit bottom before we rebound. We were there after 9/11.

Ritger: We’re seeing a growing disparity between buyers (think value is low) and sellers (think value is high). The values have peaked and were falling quickly in fall 2008 as revenues were down significantly. Financing is very difficult to obtain. Last year, you could get 75 percent financing off projected financials (post renovations); this year, you might expect 50 to 60 percent financing off actual financials (pro formas not even considered). The effect on sales is dramatic; this is the biggest hurdle to investing from a buying/selling or developing standpoint.

ALB: What’s the key to performing well right now in the Southeast markets?

Falor: There are some wonderful buying opportunity for people who can get loans. By March or April hopefully, the lending environment will have to be more user friendly and that can get transactions going again.
     Also, if you look at the Southeast markets particularly in the first parts of the year, gas at $4 a gallon had an extreme impact. There was a direct correlation, and travelers cut 200 million miles according to USA Today. Next year, barring an act of war or a major catastrophe, gas prices may remain lower, and as a result, roadside travel may persist.

Patel: Smaller towns have not been affected as much because there was limited product there to start out with. Gas prices have changed and halved, and that makes a difference in the Southeast with local tourism. You get people from Atlanta coming down to the Gulf coast for a weekend; you get people from South Georgia coming to Jacksonville for golf weekend; and you have people from Florida going to Myrtle Beach for a weekend. On the flipside, people that can’t afford to do a larger vacation — to fly out to Hawaii or the West — are using that alternative route for smaller, localized trips. So I think that’s kind of balancing it out.

Hunter: Everyone’s waiting for the first quarter for liquidity to come back, and there’s a lot of product pent up that needs to get out on the market. That will continue, and in the meantime, cash is king, and the people who have to sell assets will do it.
     The keys are to be persistent and to be realistic — buyer, seller, borrower, and lender have to be willing to do things they normally wouldn’t do. Prices are down, but they aren’t way down.

Ritger: Interestingly, hotels with existing CMBS loans may be golden. For example, in 2007 a $7 million hotel with $6 milion in CMBS loans at 6 percent would have been a tough sell, as nobody wanted to assume the CMBS financing; now, you can put $1 million in cash in and get 86 percent financing at below market interest rate by assuming that CMBS loan, so the deal is very attractive.

ALB: Looking through 2009, what can you expect for the Southeast?

Falor: There may be demographic shifts when people lose their jobs. If you’re going to make a life change you change your environment, and people tend to move South for quality of life. That will bode well for extended stay properties. We have had the honor of representing extended stay assets, and they are down nowhere near as much as the transient assets. If people lose their homes and don’t have credit scores or can’t meet minimum leases, their choices are lower, and extended stay offers that flexibility.

Patel: It will be slower than we expected, and I don’t see numbers trending up at all; in fact, numbers probably will trend down slightly in the Southeast. At the same time, I don’t think it’s going to be a threatening trend where it will be 20 percent occupancy with everyone going out of business.

Hunter: Our business as a brokerage/advisory firm will get busier. Everyone wants a BOV — a Broker Opinion of Value. Everyone wants to know what their assets are worth, and everyone is trying to make decisions. But what decisions are they making? Most everyone is getting to valuation, and most everyone is expecting something to decline. We’re putting them into a game plan, and then we’ll see more assets on the market.

Ritger: It’s a great time to buy. Wait a bit longer and the deals will be even better. We’re already seeing large discounts over just last year. For sellers, consider this adage — a decision not to sell today is a decision to hold for 3 years. PKF, HVS and other experts are forecasting a prolonged decline in hotel values through 2010 with a slow rebound. Prices are forecast to rebound to today’s levels in 3 years.

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