TAMPA, FL—With performance metrics up across the board, it’s a halcyon time for the lodging sector, and Scott Stephens, locally based principal and COO at HREC Investment Advisors, tells GlobeSt.com that his firm is having its best year to date. Nonetheless, this year’s edition of the Lodging Industry Investment Council‘s annual survey, which HREC produced, shows a lower percentage of respondents giving favorable marks to the quality of what’s on the market: 31%, down from 41% in 2013.
Stephens says it’s partly a question of whether you’re referring to an asset’s physical quality or the quality of the deal. “There are assets on the market that are quality assets, but in many cases buyers consider them overpriced,” he says. “I talk to buyers all the time, and often they’re telling me that they’re having a hard time right now finding deals that make financial sense.”
Currently, a number of potential buyers say it’s more of a seller’s market, and Stephens agrees that pricing has increased over the past 18 to 24 months. “But performance has been increasing as well,” which is a key factor in the price increases.
Furthermore, he adds, buyers have their own return requirements, “and they come up with their own pricing. In many cases, what they come up with doesn’t necessarily match what the seller is looking for.”
If it is indeed a seller’s market, it’s reasonable to expect that there would be even more properties on the market than there already are. One reason that some would-be sellers are holding back, Stephens offers, is that “so many assets were refinanced in 2006 and 2007 with CMBS. Depending on the amount of debt they put on the asset or assets, it may make it prohibitive to sell now. Even if that debt can be assumed, interest rates are lower now than they were in ’06 and ’07, so the buyer would be better off putting new debt on the asset. However, they can’t, because the current owner is locked in with that securitized debt.”
Given the current pricing of debt, “some owners are choosing to refinance rather than sell,” says Stephens. “We play in the capital markets arena as well as property sales, and that part of our business is very active right now.”
The choice some owners are making to refi rather than sell may change over the next couple of years, as 10-year refis from the previous market peak approach maturity. “As you approach that date, it becomes cheaper to get out of it,” Stephens says. “The defeasance is less. The potential to sell is much greater in the ninth or 10th year of a senior loan” than in the first or second year of the loan’s life cycle.
Even so, Stephens notes that many deals are coming to market and transacting. “There are plenty of more realistic sellers, who need to sell,” he says. Perhaps an asset is in a fund at the end of its life and now is the right time to sell, for example, or a partnership may be winding down—“there are many reasons. Now is definitely a good time to sell. Hotels are doing very well across the country. We’re just now starting to see some supply enter the market. People are traveling—any time you board a plane, it’s full. It’s a good time to be a seller or a buyer.”