When asked at the Hunter Conference on Tuesday what scares him the most about the next 12 months, Greg Friedman admits that market volatility is creating severe challenges.
“The volatility is going to get really tough to operate in this type of environment,” said Friedman, managing principal and CEO of Atlanta-based Peachtree Group. “We’re probably going to see some business pull back at the hotel level, which is going to be challenging. We’ll probably continue to be in this higher interest-rate environment, which will make it very tough.”
However, Friedman is also optimistic about how the market will eventually turn out for hotel M&A.
“At some point, I think you’re going to see the transaction market open up for us to be able to go and buy assets, and that’s what gets us excited,” he said. “Given that everyone’s dealing with higher interest rates and the need to renovate assets, that will create a buying opportunity for us. At some point, people will be forced to sell assets, and as they’re being forced, you’ll see owners get a little bit more realistic on valuations, which will create buying opportunities.”
When asked to advise owners who have had challenges in this current debt environment, Friedman stressed being proactive because this environment is taking longer to transact.
“I recommend being very proactive and being very constructive and trying to work with your current lender because, in a lot of cases, your current lender may be your cheaper source of capital,” he said. “Otherwise, you’ll probably be paying a substantially higher rate.”
Friedman was part of the “Market overview: Financial analysis and forecast” at the Hunter Conference in Atlanta. The panel included Daniel Peek, president of JLL Hotels & Hospitality Group; Teague Hunter, president and CEO of Atlanta-based Hunter Hotel Advisors; and Robert Webster, vice chairman of CBRE. Mitch Patel, founder and CEO of Chattanooga, Tennessee-based Vision Hospitality Group, moderated the panel.
Buyers and sellers
Hunter was asked about who the buyers and sellers are in this current deal environment.
“Our sellers today are the institutions… The big boys who are at the end of a fund, who are at the end of a life, who either have a PIP or have debt maturity or have some reason that they need to sell and they’re all but at capitulation,” he said. “They’ve been fighting this for three years… I’ve been telling them today is better than tomorrow. We’ve been right for the last two and a half years, and now they’re like, ‘Fine. Just sell it. Do what you’ve got to do.’”
Hunter said his book of business is as thick as it’s ever been.
“I believe that the bid-ask spread is achievable. There’s always been a bid-ask spread. In the best of times, there’s the best spread. In the worst of times, a bid-ask spread doesn’t matter,” he said. “Who are the buyers out there? It’s our local community buyers who want the asset… They can still get a loan from their local bank. They can sign personally. They can get a decent interest rate because they’ve got a relationship and they’re running through that.”
Because these buyers are getting the assets from institutions, Hunter said there’s a belief that the new owners can operate it better.
“They know they can get in there and turn things around,” he said. “There’s an opportunity for them, and fundamentally, they like the basis. If you believe in the long term, you’re going to buy that asset, you’re going to lock in and you’re going to call it a day.”
Biggest deal hurdles
When asked about the biggest hurdle to getting deals done in this current environment, Peek said the lack of big mixed-allocation private equity buyers in the U.S. hotel market.
“What you didn’t see (over the past few years) and still haven’t seen is big mixed-allocation private equity being active. The Blackstones, the Brookfields, etc. Why? Because they like something else better. They’re very active in data centers, industrial or multifamily. On a risk-adjusted basis, they like that product better,” he said.
Peek said PE has been active in other markets outside of the U.S.
“There’s just a different dynamic in the market. The hardest thing is getting that capital to have conviction on where to invest,” he said.
Peek said there is a “hole in the doughnut” regarding a type of asset that currently isn’t selling in the U.S.
“The $50-$250 million full-service hotels are not trading. Those are the hotels that have big PIPs and they’re kind of heavy. They’re very much relying upon financing because a lot of it is private equity… A lot of those assets where the PIP used to be $30,000 a key and now it’s $75,000 a key, and they’re late-cycle recoveries, and they don’t have the higher cash flow that the select-service assets have.
Those assets have largely been illiquid, Peek said, which has created a challenge. “That is where that big private equity plays most frequently, in both portfolio and single asset,” he said. “That’s the hardest thing to get done in the market today, and there’s a lack of conviction amongst mixed-allocation private equity.”
‘Sugar high’ gone
Webster said investors have had a 15-year “sugar high" making them both “excited and fat.” To continue the analogy, he likens the current interest-rate environment to a low-carb diet but says it’s better for investors to return to the norm. “We’re going back to where we were before it all started because these interest rates are much more in line with where we were prior to 2007,” he said.
While the inefficiency of this market creates challenges, it also creates opportunities, Webster said.
“You don’t want to invest in efficient markets, because efficient markets drag everybody in and the bid goes way up and the ask makes a lot of money,” he said. “If you look at the period of time when we were trading in 2021-22 that was when the bid-ask spread was completely aligned. Many trades were made, and 2022 was one of the biggest trading years ever.”
Webster said while the market was efficient back then, it doesn’t mean that the deals were better.
“If you go back in time and look at those trades that were made, a lot of those trades have turned out, in hindsight, not to be great,” he said.
Currently, the inefficient market creates a lot of questions but also presents opportunities, Webster said.
“If you go through the periods in our careers where the best deals were made, it’s when the markets are highly inefficient and you get a much higher multiple,” he said. “But you’re also taking considerable risk because of the noise.”
By Rob Schneider
