FINANCE
IF INTEREST RATES WERE TO COME DOWN , YOU WOULD SEE SPREADS COME DOWN AS WELL . IT ’ S NOTHING BUT POSITIVES FOR TRANSACTION ACTIVITY
– MICHAEL SONNABEND , MANAGING MEMBER AND CO-FOUNDER ,
rates may be at current levels for longer , resulting in some semblance of stability that factors into underwriting .
Shah thinks there are two elements at play : an owner ’ s willingness , but also need , to sell , and buyers in the market hunting for deals now as rates potentially come down . It still isn ’ t easy , as the high cost of capital has resulted in a rather wide bid-ask spread .
Hotel fundamentals , however , remain buoyant . STR ’ s global update in November showed 79 % of markets with growth in RevPAR compared to 2019 . In its final revision of the year , it also raised its forecast on both
PMZ REALTY CAPITAL
ADR and RevPAR for 2023 . “ Looking ahead to the new year , we anticipate continued growth in RevPAR ,” said STR President Amanda Hite .
Owners , Shah said , have no real compulsion to sell unless there is pressure from limited partners or debt maturities coming due . “ There was a tremendous amount of capital deployed in 2017 and 2018 and that ’ s starting to come due ,” he said .
Though interest rates are still having a mitigating impact on the ability to get deals done , buyers are calculating what a deal done today would mean five years out . “ At some point , interest rates are going to drop ,” Shah said . “ An owner will be able to refinance the debt and the lower interest rates will increase the value of the asset .”
One element that is gumming up the works is seller expectations against reality . Many owners believe their assets to have a certain value that is not shared by others . “ When buyers and sellers are trying to get together , the sellers obviously still have a higher price expectation than the borrowers ,” Sonnabend said . “ The problem for a lot of borrowers is once they come to an agreement with the seller , and they want to finance the deal , it ’ s a problem to get deals done in the current interest rate environment .”
Could a drop in interest rates put more shovels in the ground ? Conversions have made up a large portion of growth within hotel brand systems as a way to expand net unit growth , a key performance indicator and Wall Street measuring stick for companies such as Marriott International and Hilton .
According to Lodging Econometrics , in 2024 , Marriott is expected to lead new hotel openings with 192 new hotels totaling 22,298 rooms , for a growth rate of 2.5 %, followed by Hilton with 176 new hotels / with 20,004 rooms ( a growth rate of 2.5 %) and IHG with 111 new hotels / 10,924 rooms . In 2025 , Marriott is projected to open 256 new hotels / 29,572 rooms ( 3.1 % growth rate ); IHG is expected to open 202 new hotels / 19,390 rooms ( 4.4 % growth rate ); Hilton is slated to open 139 new hotels / 14,780 rooms ( 1.8 % growth rate ).
These growth rates are lower than historical rates of between 6 % and 7 %. Lower interest rates , however , lower the cost of capital , which , theoretically , lowers the threshold to achieve the economic feasibility of a new hotel . “ I don ’ t think you ’ re going to see shovels in the ground in downtown San Francisco anytime soon ,” Lesser said . “ At the opposite end of the spectrum , Miami is on fire .”
AT SOME POINT , INTEREST RATES ARE GOING TO DROP . AN OWNER WILL BE ABLE TO REFINANCE THE DEBT AND THE LOWER INTEREST RATES WILL INCREASE THE VALUE OF THE ASSET
– ANKUR SHAH , CFO , ACCESS POINT FINANCIAL
14 hotelsmag . com Jan / Feb 2024