INVESTMENT
done , but the current market volatility has made executing those deals very challenging . I ’ m pleased to report that we were involved in the successful financing of a US $ 1.25 billion hotel development deal that closed in late Spring , and we are working on another US $ 3 billion hotel / mixed use development , but these deals require a lot of fortitude .
Our team is executing over US $ 3 billion of hotel construction debt and equity placement , but to get a deal done you need a strong sponsor with a track record , great real estate and a compelling story . The high cost of development pushes the cost basis of many ground-up deals to the peak of , or in excess of , market comps for existing assets . This dynamic adds to the complexity of capitalizing new development . The bottom line is that deals are getting done but new supply is muted and likely will be muted for a long time , which means that this current wave of development deals will have a long runway to perform before new supply reemerges many years in the future . TARPEY : It ’ s becoming enticing to build again with the recent movements in commodities such as steel and lumber . Labor is still an issue , but overall , I think we ’ ll see well-priced development sites and a lull of new supply coming to the market . MARITZ : Again , it will be material . The combination of higher rates , recent new supply increases and the shift in travel patterns 9away from business transient / urban centers toward leisure / resort ) will mostly kill new urban development with all the usual carve-outs / exceptions . FAREED : Our hotel company clients have all shared that ‘ if deals are not coming out of the ground , they are either being put on hold or cancelled altogether .’ This is driven by a number of factors , including rising interest rates , but also because of rising construction costs and delays due to logistics and / or labor shortages . There are just too many unknowns , and many developers are opting to put their pencils
down rather than to try to deal with the ever-changing math . RODRIGUEZ : There will be a slowdown in development due to the higher interest rate , and more difficult capital markets environment for obtaining loans , and higher constructions costs . All this will bring down the rate of new development .
H : Which segments will be the most impacted ? TARPEY : Certainly , group and convention hotels will continue to be a tough investment at any price , as corporate spending is starting to slow down due to
THE REPLACEMENT COST IS GOING HIGHER , WHICH HELPS THE VALUE OF EXISTING HOTELS OVER TIME AND ALLOWS HOTELS TO SELL FOR HIGHER VALUES THAN ANTICIPATED .
– CARLOS RODRIGUEZ , SR ., DRIFTWOOD CAPITAL
a potential recession . Any cash-on-cash investment such as an airport hotel or middle-of-the-road limited-service hotel will be impacted .
H : What will be the impact on leisure versus business deals and development ? DAVIS : The Fed rate increases will undoubtedly slow the economy and I believe that leisure-oriented assets will likely be most impacted as consumers dial back travel to save money . Leisure-oriented assets have roared back with performance that exceeds 2019 , so those assets may give back some of their gains . Interestingly , group and business transient focused assets
are still in the midst of a recovery from the worst downturn those segments have ever experienced , so it ’ s possible that those types of assets could continue to see improving performance in the face of a slowdown . In that case , the pace of improvement will slow , but could remain positive . TARPEY : Leisure spending and travel will start to slow down with inflation and a soft Euro as the U . S . leisure market will normalize from its record highs . This will impact future projections for buyers and therefore what the asset is truly worth today .
Business travel is already being restricted by public companies due to cost cuts . This will mostly impact the major brands .
Development is an opportunity for the right buyer with patience and cash .
H : How will higher interest rates impact leverage ? DAVIS : Some lenders have not reduced leverage , while others have lowered leverage by 5 points across the capital stack . TARPEY : The high leverage debt funds are pulling back , so we ’ ll see an increase from the banks transacting at conversative
40 hotelsmag . com September 2022