SAN DIEGO—Yields are generally higher for hotels—a unique segment of the commercial real estate market—than other property sectors, Azul Hospitality Group's new principal and CIO Mark Crisci tells GlobeSt.com exclusively. We spoke with the seasoned industry veteran about his new role at the firm, what makes the sector attractive to investors and how it compares to other property sectors.

GlobeSt.com: What are your goals in your new role with Azul?

Crisci: It's a natural fit. I've had the special benefit of watching Azul grow over the last eight years, so when the opportunity came up to join them, it was a no-brainer. Right now, it's primarily a third-party-management platform and it will continue to grow in this space, but it can also achieve growth through co-investment with private equity firms and high-net-worth individuals. Also, from a scale standpoint, the company will double in size this year, so it will continue to be in a smart growth pattern. With the right owners and deals, the sky's the limit with this platform because of its versatility.

GlobeSt.com: How do you view the current strength of the hospitality market as a real estate sector?

Crisci: Right now, it's actually pretty frothy, which can be good and bad. Pricing levels seem to go up and cap rates seem to drop. I've been in this business for more than 20 years, and I've seen a couple of cycles. You have to be careful in markets like this because there's so much private equity in the market right now, which tends to drive prices up. We're competing with funds on 5-cap or 7-cap-type deals, so it's pretty frothy pricing. Different groups have different return criteria. I've always been value-add, so we're looking for returns more than other types of investors, and you have to be creative with what you look at. But hotels are always going to be a market-by-market, street-corner-by-street-corner type of industry.

From the last cycle down, I was involved in hotels that grew during that time, and they were in markets that were insulated from what was affecting the country as a whole. You don't only focus on macro statistics because there are a lot of factors that affect the market other than macro events. There are a lot of hospitality properties outside of the top 25 markets, and you have to keep those in mind.

GlobeSt.com: How do hotel valuations compare to those in other sectors such as office, industrial, retail and multifamily?

Crisci: Our cap rates are still higher than the others, but in most cases our business is riskier than most. We're renting our rooms every night. With the other sectors, the lease components are much more long term. Inherently, risk–adjusted returns for hotels are separate from the other food groups. People lump hotels into the real estate sector, but we're an operating business, and that's the great thing about it. You could have a well-located asset that's well branded, but it might have a broken capitalization structure or the wrong operator, and we can turn it around into a profitable venture. This is unique to hospitality, and you don't have the same opportunity in the other food groups. Better operators and owners have figured out how to do those types of things.

GlobeSt.com: How do lenders view this sector, and how are their underwriting standards for it evolving this year?

Crisci: I still see lenders being cautiously optimistic, but they're much more bullish than they were two to three years ago. The sector overall is doing a lot better, but bad times with overleveraged deals are still etched in their memory. So, they structure around t hose types of things or try to protect themselves in the capital stack. Part of it has stayed somewhat disciplined, CMBS has loosened up, but those lenders have shown the right type of restraint relative to leverage levels, so equity funds have the opportunity to come in and do their equity piece. The first-mortgage guys have stayed disciplined, which is good. The fact that the industry has come back the last two or three years has helped tremendously—a rising tide lifts all boats. It didn't bail everybody out, but it helped quite a bit.