A Wary Celebration
This is an HTML version of an article that ran in the July/August 2013 issue of Real Estate Forum. To see the original story, click here.
Hotel owners and financers would love it if the good times continued to roll, but they appear to be prepared for the moment the sector’s recent golden era comes to an end. Such was the tone of a conversation among them at Real Estate Forum’s Annual Hotel Power Panel, held at the Marriott Marquis in New York City during the NYU Tisch Center Hospitality Conference.
In a wide ranging, no-holds-barred discussion, the group talked about the performance of MSAs vs. secondary and tertiary markets, the economic recovery, the rise of CMBS, franchising and various waves the future.
(from top left)
Access Point Financial
Chief Investment Officer
Pyramid Hotel Group
New Castle Hotels
John Salustri (Moderator)
ALM’s Real Estate Media Group
Chief Officer, Full-Service Franchising
Chairman and CEO
First Hospitality Group
Senior Vice President, Acquisitions
Starwood Capital Group
JOHN SALUSTRI: At the NYU Hospitality Conference in June, Jonathan Tisch said the recovery is going great. Then Mort Zuckerman said he’s scared. So who’s right?
DAVID BUFFAM: In our business you have to have a model that works in either scenario. Frankly, we would prefer a slow, steady recovery to one that’s up and down. Because each of our hotels has a long gestation period, we like that we can work steadily on a project, deliver it three or four years later and find that it has a strong market, because we haven’t built it for a particular time. We built it for a quality level that will work no matter what the cycle is. You have to tailor your plan to either scenario.
STEPHEN SCHWARTZ: As David said, we build and operate hotels with a long-term perspective, a long-term horizon. This recovery is sporadic and location-specific. In certain markets we’ve done very well while others are stuck in neutral. We tend to be a bit contrary, and we started a development cycle about three years ago. We opened our first hotel in Milwaukee about six months ago, and we have another that’ll open in a couple of months. This too shall pass, and when everybody starts building is when we start really getting cautious, because there’s a three- or four-year gestation period. So you don’t want to come out in the middle of a recession. We’re cautious and we’re looking for opportunistic buys while trying to team up with solid partners.
SURIL SHAH: I agree. You have to position yourself for the next downturn, and a private-equity firm like us can’t do a five- to seven-year hold on the assumption that it’ll be roses for that entire period. You have to maintain moderate leverage and conservative growth assumptions and try to find assets that can weather a downturn. Putting a capital structure in place that helps you do that is very important to us and obviously is one of the big lessons that we’ve learned over the cycles.
KIP VREELAND: Hotel occupancy is generally back to ’07 levels, so things are starting to move in the right direction. As a company, we’ve got a lot of different brands that we represent, but our big-group houses are starting to feel some strength, so booking pace seems to be coming back. The government segment is certainly a problem in a number of markets with the sequestration; many hotels have been impacted by that. Until supply starts outpacing demand again, the industry should maintain some growth for the next couple of years.
WARREN FIELDS: Demand is better than we had thought over the past two or three years. Some portions of the country have not been able to drive ADR as fast as others. The development perspective is good for all of us in the industry. That has the possibility of changing over the next 24 to 36 months, particularly if more financing becomes available. Even in New York City, where 10,000 rooms have been added or are under construction, demand is still very strong. Markets such as Boston and Philadelphia have exceeded demand expectations as well. The anomaly has been Washington, DC. Revpar is down double digits this year in our nation’s capital. We at Pyramid are bullish about the demand picture across the country. The one constant that all of us have seen in our careers is that low basis usually wins. If you have low basis in a market, you can pretty much weather the cycles.
JON WRIGHT: We participate in bridge loans and quasi mezz, which is where we value more robust pricing metrics in the capital stack. Therefore we don’t typically lend in the top 5-10 MSAs as they become reverse auctions for the pricing and the money center banks occupy that space. We tend to be in the tertiary markets whereby we garner business via ease and certainty of execution vs. pure commoditization of economics. We are opportunity capital and compete more against community banks and mid-market lending range up to $25 million.