The hotel industry is one of many facing uncertainties due to COVID-19. As Cushman & Wakefield helps navigate our clients through this unprecedented time, we will continue to mirror hotel investor’s long-term goals and the anticipation of the future upside. Below we highlight the U.S. hotel industry’s current landscape, opportunities and strategies, and as we continue to look ahead.
At-A-Glance
- Hotels in U.S. are struggling to stay afloat and many of them have closed their doors. However, hotels near airports, highways and medical facilities are performing better than most along with economy hotels and motels as they accommodate guests at lower price-points with a residential-like base of demand.
- In this time of need, hotel owners, managers and brands are supporting local communities by providing rooms at no charge or at a reduced average rate to first responders, medical personnel, isolating individuals and those without a permanent residence.
Investment Opportunities
- Similar to previous downturns, cash is king. Substantial capital is poised in the market from private equity firms and opportunistic funds to execute on hotel investments when they become available. Investors and lenders have learned from the recovery of the Great Recession and are poised to act quickly. Owners and investors view the scale of available cash to be the strongest resource to weather the Covid-19 pandemic.
- Current hotel investment opportunities include:
- Note sales from private REITs and other lenders offering mortgages at discounts
- Properties that are closed and in need of a PIP but now have little cash flow
- Land banking of entitled construction projects that are unlikely to get funding in the current environment
- Compassionate/Relief capital – providing additional capital to maintain the cash flow structured as preferred equity
Financing Strategies
- Borrowers are actively working with their lenders to amend bank credit facilities to provide extension options for the next 6-12 months, waive or modify certain covenants and establish interest reserves for near-term debt service.
- While CMBS negotiations are difficult due to the regulations of the issuances, special servicers have specific rules to follow and commercial banks and balance sheet lenders have more flexibility.
- If a hotel loan includes participation from multiple banks, borrowers are advised to work with senior lenders as funding will be extremely difficult to replace. Regardless, further creative financing or preferred equity will need to be negotiated with the senior lender.
- PACE financing may be available for construction or newly opened projects. A PACE assessment is a debt on the property in which the payment is made via a voluntary tax assessment. Some PACE loans can be prepaid while others cannot.
- Some private groups are offering ground lease financing – converting the land held in fee to a ground lease.
Operational Sourcing of Cash
- Hotel owners are pursuing various avenues to increase cash reserves including:
- Working with the property manager, lender and/or brand to access the reserve for replacement for expense and payroll obligations.
- Negotiating with hotel franchise companies to have short-term reductions in fee payments and renegotiating upcoming PIP projects in exchange for franchise and management agreement extensions and repayment programs. Some franchise companies are providing temporary licensing suspensions to allow hotels to work with local counties and cities to accommodate populations most affected by the pandemic.
- Applying for SBA and other government sponsored payroll protection and lending programs.
- Working with property tax assessors in an attempt to defer payments during the crisis.
- Leveraging federal assistance through loans and grants that are expected to benefit all product levels of the hospitality industry.
- Utilizing programs such as the CARES Act and the Families First Coronavirus Response Act that aim to help hotels through payroll programs, tax benefits and family leave policies.
Perspective on Recovery
- Numerous hotels have closed for a notable period of time, and the hotel market is operating at an all-time low. This is an unprecedented response in contrast to prior downturns.
- The timing and process of hotels reopening is still uncertain even with the June and July 2020 projected reopening dates.
- While previously expecting a quick V-shaped recovery, market participants are now expecting a more extended U-shaped recover given a couple of factors. One, some hotel markets were declining pre-COVID-19. Two, remaining uncertainty around the timing of the return of travel and demand for rooms.
- Looking forward, lodging that is easily accessible by car from major population centers are expected to be first beneficiaries of pent up leisure travel demand.
- Conversely, group demand is expected the slowest to recover due to concerns and possible regulations around large groups of people.
- As projects continue to halt due to construction financing pullback, proposed supply may be less of an issue in certain markets. That said, currently under construction and delayed hotel openings will remain a threat to existing hotels reopening.
As valuation and advisory professionals, we understand our client’s needs. While the process for hotel analysis and appraisal is currently more difficult, our approach continues to rely on thorough due diligence and analysis of each individual asset and market, as well as the consideration of information gathered from research and ongoing discussions with lenders, brokers, owners and managers.
