HotelsMag March-April 2022 | Page 60

get stung on an exit , there are two multifamily investors that are being attracted to the hotel sector by the comparatively high yields .
This continuing attraction to the hospitality sector is a function of the fact that the “ four major food groups ” for real estate investment are relatively unattractive . Multifamily and industrial values are bid up and yields are razor thin , whereas retail and office markets are facing more profound , existential challenges . Multifamily investors , in particular , should “ play well ” with hospitality , as it is a natural steppingstone from apartments and the lines between the sectors are rapidly blurring . Witness the rise of Airbnb and newer hybrid concepts such as Bode or Sonder that marry the hotel and apartment experiences .
Of course , let ’ s not forget that some hospitality property types are currently very much out of favor , including “ big box ” full-service properties in major urban markets that rely heavily on meeting , group and convention business . The hurt is real and it will take some time to right that ship . We know that the sector will attract creative and ambitious developers that understand how to right-size capacity with some properties being converted to other uses – anything from apartments , student and senior living to gaming or club concepts . Stay tuned on that front .
FINANCING OUTLOOK Despite the many global challenges right now , in epidemiology and politically , as well as those endemic to hotel investing , the U . S . remains one of the most desirable real estate marketplaces . Factors include the relative stability of our government , legal system and capital markets ; the reasonable liquidity of investments and the attendant protections provided to individual civil liberties and property rights , all combined with the size and buying power of our market .
Yes , the risk-free interest rates are likely to rise , but they will be doing so from historically low levels . However , hospitality credit risk financing spreads that widened dramatically in the teeth of the COVID crisis have room to compress to offset some of the pain .
Similarly , leverage levels are rising as we get deeper into a resumption of trading activity and “ floor values ” are being re-established . However , if you believe that inflation is not transitory but rather is here to stay , then , of commercial property classes , hotel operators with their 24-hour leases have the greatest ability to re-price their product and pass on additional costs to endusers .
“ IT SEEMS THAT FOR EVERY CLOSED-END PRIVATE EQUITY FUND THAT MISTIMED THEIR INVESTMENT AND IS GOING TO GET STUNG ON AN EXIT , THERE ARE TWO MULTIFAMILY INVESTORS THAT ARE BEING ATTRACTED TO THE HOTEL SECTOR BY THE COMPARATIVELY HIGH YIELDS .”
– STEPHEN O ’ CONNOR
Many hotel owners are also facing serious deliberations on whether to continue to carry hospitality investments that can ’ t cover debt service , as well as whether to reinvest in properties through the resumption of deferred customary capex expenditures or formal property improvement plans . The current thought is that the major brands are anxious to complete PIPs that are necessary to maintain property competitiveness . In that case , owners must evaluate whether it is prudent to seek a refinancing to fund the necessary investments or “ sell the dream ” and leave it for the next owner to undertake .
Ultimately , the repayment of debts can only be deferred for so long and for so many properties that require major infusions of equity capital that may trigger a sale . As a result , 2022 should see a material increase in both refinancing and sales activity . Fortunately , there is no shortage of ready and willing buyers with equity raised and ready to be deployed .
58 hotelsmag . com March / April 2022