Year-to-date hotel transaction activity may best be described as that of “the haves and have nots”. The “haves” are owners with assets that possess one or more of the following characteristics: top tier market; prime location; relatively newly construction; unencumbered by brand and / or management or branded with a top tier flag; and non-union. For these owners, their assets typically attract a large of pool of potential investors that have included the REITs, PE Funds, Sovereign capital, and family office investors often creating a feeding frenzy that results in premium pricing. The “have nots”, are those properties where investor underwriting becomes far more discriminating and disciplined with bids that may be 10-20% below the high-water mark set of mid 2015. For these hotel owners, refinance has been the path of least resistance.
Hotel owners who chose to re-finance their hotels in the first half of the year found an eager and welcoming debt market. With election jitters behind us, and the Trump bump providing a boost to the US stock market and psyche of business leaders, the spigot for debt capital allocated to hotels was fully open. Refinance and acquisition debt for stabilized or near stabilized assets is available from balance sheet lenders and public market providers alike. Construction and deep turn re-development debt from the money center banks and the large regional banks continues to reflect strict underwriting discipline which often translates to a simple no or at best low leverage, 50% +/- LTC loan amounts. That has not turned the construction spigot off completely though as private lenders have picked up the slack by either providing the full stack or mezzanine tranches at albeit higher pricing and with tougher terms including in some cases PGs. For smaller projects, local and small bank relationship capital remains widely available to customers willing to provide recourse and maintain significant deposit accounts with their lender.
From an interest rate perspective, the movement of the Fed to gradually increase the benchmark rate does not appear to have impacted the supply or demand for capital. Overall interest rates available to borrowers remains substantially below the long term average. Recent concerns that the U.S. economy may not be reflecting the GDP growth anticipated by the change in administrations will likely result in a continuation of this prolonged period of below the historical average interest rates.
Looking to the balance of the year, we anticipate that hotel fundamentals will continue to reflect the continuation of moderate to slow growth that has been reflected in hotel performance over the first half of the year. Specific market fluctuations will vary largely based on the amount of new supply entering the market, which will continue to offset any demand growth created by positive economic activity. Investment activity consequently will likely continue to revolve around transactions limited to the haves, and the refinancing of the have nots.