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Central Regional Hotel Update
Highlighting hospitality trends around the United States.
Interviews by Dan Marcec & Ashley Ball
Brokers, developers and hoteliers around the country are looking for the best ways to maximize hotel investments amidst declining operating trends and a lack of available financing. In the Central region of the U.S. — for the purposes of this article, the Upper Midwest and Texas — major markets are performing similarly to their counterparts across the country. On the other hand, this area of the heartland is rich with secondary and tertiary markets. Many of these markets have been weathering the storm, and in some cases, even trending upward, while others have been hit hard.
AAHOA Lodging Business interviewed several experts for a pulse on the industry in their particular markets. Daniel Beider, senior managing director and chairman of Paramount Lodging Advisors, and Seth Glickman, vice president of Hotel Source, Inc., both of whom are based in Chicago, spoke about the Midwest hospitality market, and Rahul Bijlani and Michael Yu, associate vice presidents of investment and directors of the National Hospitality Group of Marcus & Millichap, based in Houston, covered the state of the industry in Texas.
ALB: What trends are you seeing with regards both to operating trends and the investment climate?
Glickman: We primarily work throughout the Midwest, and as is the case across the U.S., a lot of major markets are seeing significant RevPAR hits to begin 2009 against last year’s numbers. However, I think the hits have not been as hard in some of the secondary and tertiary markets throughout the Midwest. I think to some degree, some of those markets are leisure based and smaller, and there has been a trading down effect. Thus, you’re seeing some stability in some of the properties in those markets.
Beider: We are seeing booking trends slightly up starting in the 2nd quarter, specifically in April. That being said, the booking window has clearly changed, and we are back to a 21-day booking window for much of our business, and it is very difficult to project anything more than a couple months out.
As an optimist, I am going to look at the trends on properties with which I am intimately familiar, and I personally believe we will begin seeing some recovery in limited and select service assets in the 2nd quarter. The sales/investment market remains stale, mostly due to lenders most likely being too busy dealing with non-performing loans. Even those that continue to lend will stick with their stable of developers and only the best sponsors — which is how it should be anyway. We should see a fair amount of foreclosed assets trading later this year and probably significant note sales from lenders. This will likely be the most significant hotel-related investment activity for the remainder of 2009.
Bijlani: Overall the market is a declining except for in a handful of areas. Even though numbers in Texas have been declining, they seem to be doing so at a slower pace than many other parts of the country.
Yet, there are “recession-proof” markets in Texas, though they’re very submarket specific. The state of Texas is still a pretty good place to be because it has a strong economy, there’s a low tax burden relatively speaking, there are a lot of energy based businesses, there are a lot of trade related areas, and there are huge medical and military business markets as well. College towns are an example of “recession-proof” markets, and the area around the Texas Medical Center, which is the largest medical center in the world, has been hit much less hard. If you look at markets that revolve around military business, depending on how many hotels are being built in those markets, those perform well overall. Their problems would have more to do with overbuilding, but I don’t think they’ll necessarily see a RevPAR decline per se in terms of a reduction of business in that area.
ALB: What deals are getting done? Is financing available for new construction?
Glickman: There are some deals happening under $15 million, and those are largely through local banks, community banks and smaller lenders who can look at those opportunities for hotels because they understand the local market. However, even these smaller banks are being more conservative. Maybe where they used to loan 80 percent of the project, now it’s down to 65 or 70 percent. They’re not blind to the challenges out there.
There is a general discouragement in terms of pricing, but it is really a case-by-case basis. There are good properties that now look comparatively better because they are stable. To a lot of people, a good deal is still a good deal and there are still buyers out there. My general message is don’t get TOO discouraged because every property is different, and you can analyze it on an individual basis, rather than getting too sucked into the herd mentality and trying to apply macro trends where they shouldn’t be applied.
Beider: Very few. Even deals that are getting done seem like the most complicated deals lenders has ever seen. Again, the best sponsors are getting their construction and take out loans. Lenders won’t talk much about it because I do not believe they are interested in speaking with unqualified sponsors who are still out there trying to do deals. Hopefully this will shake out plenty of the late comers to the parade last cycle.
As I noted, I believe the most significant volume will come from note transactions. However, slowly we feel a loosening of lenders belts, and I think by 3rd quarter we should see some transaction volume picking up, but staying in the smaller asset area, less than $30 million.
Bijlani: Deals can get done with assets that are under $10 million because they’re easier to finance; and deals can get done for assets that have an operating history, because buyers and lenders are being a little bit more discerning — if these two criteria are not necessarily met, then it needs to be a seller that is sufficiently motivated.
ALB: What advice are you giving hoteliers and -investors?
Glickman: The advice we’re giving to buyers is to keep perspective. Every property and every market is unique. If you get too caught up in headlines you might turn away from something that is a good opportunity. But buyers have to have more due diligence if they’re going to make an acquisition. From a seller standpoint, you have to be realistic. Maybe there should be an expectation adjustment in some cases. If the goal is to sell, you need to have more of an open mind about what sort of transaction scenarios you’re willing to work with.
To developers what I would say, there is a “keep your head up” mentality. Don’t assume there is no financing and stop looking. Where the market is going to be in 6 months, nobody really knows. You can’t just say “I can’t get financing in this market.” There are a number of other things you need to do before you think about even trying to get financing for the deal, and those take time. If you have an opportunity that you like, pursue it and then when you’re ready to go get financing, you can assess where the market is at that time — no one can tell the future. Opportunities will appear for better or worse. Values might fall, or if you’re an owner and you own right now, if everyone in your market is cutting back, you can gain market share.
Beider: The advice we are giving is to be a better operator. Great innovation comes in times of recession and downturn, so take advantage of the requirement to be creative and find ways to be more efficient, sell through new and creative channels, and if you are not a good operator or an investor without much knowledge of the industry, take a hard look at your management company or consider hiring an asset manager with operations experience.
Bijlani: The feedback we have for hoteliers is that the days of flipping seem to be behind us. Right now, it’s kind of back to a more traditional real estate strategy of capital preservation and holding onto assets for the long term.
Yu: We see a significant decline in land value coming for the next couple years. So land buyers can get a significant discount over what they’ve seen before. Raw materials are down as well, and there will be significant savings for the next 12-18 months.
One of the things I do see in the downturn is that the people who invest in this current market usually realize significant capital appreciation once the -market turns around.
ALB: How are secondary and tertiary markets performing as compared to the major markets?
Glickman: You do still have college towns in say, Madison, Wisconsin and Lafayette, Indiana, where there are still major Big 10 universities that are still having events and students.
The trading down for trips does occur, and that helps some markets people don’t know anything about; all of a sudden they’re getting travelers because people want to get the family out of the house, but while staying close to home.
Beider: We can’t really generalize, because individual markets have very different fundamentals right now. One major company on a travel freeze can crush some smaller markets, but other smaller markets with many small demand generators may be affected much less than the industry at large. I think it’s time we all stop generalizing both on performance, transactions, etc and focus on fundamentals of deals only. It’s what this industry is about anyway.
Bijlani: That’s a tough question, because it becomes very submarket specific. Texas, as you know, has a huge number of secondary and tertiary markets; in fact, we generally see a good amount of business turnover in those markets for buying and selling activity because there’s a lot of inventory in those markets.
For example, people believe that oil and gas prices are unlikely to stay this low and that they have to trend higher; now, I’m not really in the position to be able to predict where commodity prices are going to go, but if investors are part of this group that are willing to wager on higher commodity prices, and I’m observing that a lot of people are, then the secondary and tertiary markets in West Texas are an excellent place to be because they really are the center of U.S. oil and gas. But not just that, it’s that they are quickly becoming a focal point of wind energy as well, and wind energy expansion in West Texas is currently only held back by the expansion of the power grid. As soon as the power grid expansion is completed, which is expected over the next couple years, you’re going to see construction of these massive wind energy farms, and we think that is going to bring a lot of business to the hotel industry in West Texas, even without taking into account the oil and gas.
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© 2009 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For more information on reprints of this article contact Barbara Sherer at (630)554-6054.
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© 2008, France Publications, Inc. All Rights Reserved. Photos in header (from left to right) are courtesy of InterContinental Hotels Group; AmericInn International LLC; and The Courtyard by Marriott-Los Angeles/San Fernando Valley. |
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