PHOENIX — Prior to the pandemic, some hotel executives were openly rooting for a downturn or a recession to open up the possibility of distressed asset sales similar to those seen in the wake of the Great Recession.
So far, they've got the downturn and not the distress. Speaking during the 2022 Lodging Conference, BRE Hotels & Resorts President and CEO Joseph Berger said the two macro-economic events have simply been incomparable.
"There's a ton of liquidity chasing hotel assets right now — a completely different world — and it makes buying hotels quite difficult because they're quite competitive," he said during the "From the CEO Perspective" panel. "You really have to have conviction on where you can take an asset, how you can reposition an asset, and where it's going to be when you try to exit it."
That high level of competition has kept sellers' pricing expectations high and muted overall transactions volume, but a significant amount of upcoming debt maturities — along with waning patience from lenders — could motivate more sellers to come down a bit, said Greg Friedman, managing principal and chief executive officer of Peachtree Hotel Group.
"You look at the rise of interest rates, you look at how spreads have blown out over the last six months and continue to remain elevated to where they were 12 months ago," he said. "Index rates continue to move up, and in a lot of cases you end up with negative leverage. I think it's going to be a pretty interesting market as you go into 2023 because there's a lot of debt maturity and the debt maturity issues ownership groups are going to face. I don't want to say there's going to be a lot of distressed selling because there is still liquidity in the market, but it's going to start putting pressure on pricing."
Tyler Morse, chairman and CEO of MCR, said high pricing isn't just a hotel industry issue.
"Interest rates are going up, so [capitalization] rates should go up, right?" he said. "We should all be able to buy stuff cheaper. It's not happening and it's not going to happen."
Morse said at this point pricing on deals simply doesn't make sense.
"The 10-year treasury was at 5.25%, and people were buying hotels on at six cap. You've got to have your head examined to buy hotels for a 75-point risk premium," he said. "But nevertheless, it happens because there are 2,500 people in this room whose job it is to buy hotels."
Similarly, other sectors of commercial real estate are struggling to find equilibrium, Morse said.
"What happened in industrial and multifamily is cap rates continue to come down because of the flood of capital," he said. "So it's going to take even greater conviction than before."
Friedman said multifamily in particular could be a harbinger of things to come for hotel assets.
"It's gone through a huge repricing over the last 90 days, and it's continuing to have a softening in pricing," he said.
Keith Pierce, executive vice president and president of franchise and development at Sonesta International, said the ability to get deals done will revolve greatly on the owner and asset class. For example, Sonesta part owner Service Properties Trust sold 85 hotel assets — many of which are extended-stay properties — over the last 12 months, with Pierce adding that replacement cost is still vital.
"So we can talk about interest rates and debt markets, but in many cases the sponsors — specifically for extended stay — have the capital to buy them because it's all about the replacement costs," he said.
Morse said MCR has bought 60 hotels during the pandemic period. He added battling back things like interest rate increases and inflation will depend largely on pricing power.
"We have Hampton Inns that we maybe used to charge $100 [average daily rates] for that soon we're going to charge $200 for," he said. "That solves a lot of debt problems."
Berger said another solution on the hotel operations side is to think of new revenue streams and to capitalize on the types of demand that typically went to alternative accommodations platforms like Airbnb.
“We have to start looking at our hotels a bit like alternative accommodations where we can do things like bachelorette parties, bachelor parties, little family reunions," he said. "I think there's a lot of things around what we do for a living and what our assets consist of that really allows us to be just as competitive as alternative accommodations.”