capital than any reasonably aggressive investor would have underwritten .
Overall , recovering net cash flows are under steady pressure , which portends greater difficulties to continue meeting expectations for net operating income growth in the second half of this year and into 2025 . While an election year traditionally means actions to stimulate and support the economy , if recession looms , owners will try to tighten their belts further and remain reluctant to spend on CapEx .
CRUNCH TIME The present hospitality
Stephen O ’ Connor
investment environment is rife with myriad challenges . One includes pending debt maturities that need to be refinanced in a substantially higher interest rate environment than when these loans originated . At the same time , as interest rates stubbornly remain higher for longer , capitalization metrics create a bias toward lower asset values . Meanwhile , CapEx pressures aren ’ t going away ; in fact , they continue to be an important factor in deal negotiations , in many cases driving both buy-sell and financing strategies .
Given these financial pressures , owners need to carefully consider the properties in their portfolios and come to an honest assessment of current valuation relative to debt obligations . However , this doesn ’ t mean that valuation is determined by a simple cap rate , especially for distressed , but otherwise valueadd assets .
From the owner ’ s perspective , the true value of a property is based on the reasonable expectation for cash flow to increase over time . As the window for deal-making compresses , a seller ’ s negotiating
leverage can rapidly dissipate . This valuation analysis is heavily reliant on possessing real-time market knowledge and understanding what buyers are truly willing to pay for assets without financing contingencies .
As hotel owners formulate portfolio strategies going forward , we are advising them to plan for continued volatility in the capital markets and to not be lulled into complacency by the prospect of a falling fed funds rate . Though the need to restructure and recapitalize at this point in the cycle is often driven by debt obligations , picking which assets in a portfolio to sell or hold often comes down to an owner ’ s capacity to write a check for loan paydowns or capital expenditures , looking beyond investment horizon and risk tolerance considerations .
The cost of capital is high , a reminder of why , on a stabilized basis , hotels tend to trade at the highest cap rate of any form of commercial real estate . The good news is that there is liquidity in the financial markets and though equity solutions are difficult right now , many entities who have been sitting on the sidelines remain eager to deploy capital , especially in taking subordinate debt positions .
Within this framework , owners of hospitality portfolios should — and quickly — analyze their options , also considering preferred market and property type allocations . All investors only have a finite amount of capital to deploy — spend it in an efficient manner .
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