With so many question marks relating to the economy, Hotel Business reached out to executives on the front lines of the brokerage arena to get their take on where we are and where we are going. Terry Baltes, manager, Baltes Commercial Realty Ltd.; Jennifer Church, president of Hotel Brokers International (HBI) and president, Milmark Hotel/Motel Investments LLC; Joseph Kennedy, president of Crystal Investment Property LLC; and Gary L. Smith, president/CEO, Smith Dean Burgett, provided insight.
— Gregg Wallis
How would you characterize the 2019 transactions market?
Baltes: The transactions market is very active. The only limiting factor is the lack of sellers. Interest rates are historically low, which allows buyers to borrow more dollars, which, in turn, creates higher sale prices. Financing is readily available for experienced hotel operators with solid financial statements. There are a lot of new players in the hotel sector who have moved over from the retail, office and multifamily sectors, seeking a higher return on their money.
Church: HBI offices are seeing another strong year in the market, as our 2019 transactions are on pace with 2018.
Kennedy: Very strong. It appears that sellers are willing to look at taking their profits from the huge run-up in property value over the past several years and are confident of finding replacement properties.
Smith: Our transactions are down from 2018, but we are seeing an uptick in activity in the second half of 2019. Popular sentiment from larger investors is a recession may be coming and they are taking a wait-and-see approach.
What is driving the activity?
Baltes: There is a lot of money out there chasing all types of investments and no place to put the money to earn a good return. The stock market is very volatile at this time; thus, a lot of money is looking at the hotel sector for a better return. The hotel sector has had a good, long run and predictions are very positive going forward, albeit things are slowing down a bit as far as increasing revenue and increasing net profits.
Church: There is continued confidence in hotels as an investment class; as many sellers are trading up to larger assets, new buyers are coming into the industry, and lenders are actively looking to finance the transactions.
Kennedy: Perception by sellers that the market has peaked and confidence by buyers that they can sustain cash flow with the positive lending and interest rate environment are driving activity.
Smith: Reasonable financing terms are still available, along with strong hotel performance and a good supply of inventory.
Would you classify this as a buyer’s market or do sellers have the advantage? Why?
Baltes: It is definitely a seller’s market. There is very limited good product available. When we get a good, well-branded hotel, we have multiple offers immediately. Sellers are reluctant to sell now because their hotels are performing well with positive cash flow, and there is no place to invest their sale proceeds. We have a number of owners who would sell, but they don’t want to sell until we have something lined up for them to buy.
Church: Across the country, this seems to fluctuate. Some of our offices are seeing that the sellers have the advantage currently because there are many active buyers for all property types and financing available. Other offices reported a stable market as they have plenty of buyers and also plenty of inventory available.
Kennedy: Sellers still have the advantage. Quality properties are slowly becoming available, and there continues to be a lack of product to meet the pent-up demand.
Smith: It seems we are still in a seller’s market, but as we go into 2020, that may be changing due to declining performance indicators, a volatile political climate/election year and questionable economic forecasts.
Where do you see the greatest churn happening going forward?
Baltes: Construction costs have really increased over the last several years getting to the point that it is hard to find a deal that makes sense. The other problem is there have been so many new hotels built that it is very difficult to find a good site and a good brand. Hotel owners can no longer count on revenue automatically increasing every year without any effort. With the number of new hotels that have been constructed, occupancy rates are going to be stagnant. ADR will increase, but so will operating expenses. Operating expenses have increased an average of 4% over the last several years. Owners will have to be very diligent about controlling expenses in order to maintain their net profit. This is going to be very difficult to do in a tight labor market with rising costs for insurance, taxes, utilities, etc.
Church: Our offices seem to feel we will see the most churn in franchised properties with large PIPs on the horizon and older properties that have exterior corridors.
Kennedy: As fears of recession increase and consumer confidence lessens, we expect lenders to require buyers to bring in greater down payments and be better capitalized, which will reduce the pool of available investors. We expect consumer sentiment and lender hesitation will be the greatest sources of churn moving forward.
Smith: For us, it is the limited-service mid-market and economy brands. Buyer demand in this segment and product availability should allow for a good transaction volume.
What is your focus for the rest of the year and into 2020?
Baltes: Our focus will be on pricing assets correctly. If an asset is priced correctly, it will sell very quickly. It is a disservice to a seller to overprice their hotel and give them false expectations.
Church: We are projecting that midscale and upper-midscale properties will have the greatest potential for transacting in the next 12-18 months, based on their operating strength and availability of financing.
Kennedy: Bringing properties on the market at aggressive valuations, which still meet the cash flow criteria for lenders and buyers.
Smith: Keeping sellers informed of the changing market conditions in an effort to be more selective in taking listings that are priced to the prevailing market. HB