DENVER — Members of the Lodging Industry Investment Council (LIIC), a hotel industry think tank, completed a flash survey on March 15, 2020, to take a snapshot of the current state of the hotel investment market in light of COVID-19. Altogether, the members of LIIC—including investors, lenders, corporate real estate executives, REITs, public hotel companies, brokers, and significant lodging equity sources—represent direct acquisition and disposition control of more than $60 billion of lodging real estate.
Mike Cahill, LIIC co-chairman and HREC CEO and founder, produced this flash survey with assistance from James Few and Christian Walsh, associates in HREC’s Denver office.
Below are insights from the flash survey.
Top threats to hotel investment
The top three threats to hotel investment, according to survey respondents, are COVID-19, an anticipated economic recession, and a decrease in domestic corporate and leisure travel, respectively, overtaking the previous top investment concern of new hotel supply additions.
Forecasted Hotel Transaction Levels for 2020
Half of the survey respondents believe the total dollar volume of U.S. hotel transactions in calendar-year 2020 relative to year-end 2019 will decrease up to 25 percent. Thirty-four percent believe the COVID-19 impact will be greater and produce a 25 percent to 50 percent decline in dollar volume. The total number of assets forecasted to be sold by year-end 2020 is anticipated to decline by most responders—20 percent forecasted a decline of up to 10 percent, 30 percent forecasted a decline between 10 percent and 25 percent, and 32 percent forecasted a decline between 25 percent and 50 percent. Compared to post-9/11 when the U.S. economy was already headed into a recession and transactions/lending virtually stopped, this is considered positive.
Property-level hotel cash flow to rebound quickly
LIIC members believe that hotel asset-level net operating income (NOI) impact from COVID-19 will normalize (a return to 2019 cash flow performance) rapidly. Of particular note is 27 percent anticipate full recovery within six months, and an additional 48 percent believe full normalization will occur within six months to a year. As a result, 75 percent believe they will see full normalization within a year.
Buyers are taking a moment to assess.
While 64 percent have put pencils down and have stopped submitting letters of intent to purchase, the remaining 36 percent are going forward, viewing less investor competition as a great opportunity. Roughly two-thirds of LIIC believes in moving forward and continuing to underwrite new hotel investments under more focused and revised parameters.
Temporary bid/ask spread issues
Three-quarters of LIIC believes that hotel investors with assets under contract are entitled to a re-trade on price based on short-term cash flow impact. For those with a hotel under contract for purchase, 72 percent believe the closing date should simply be extended and 16 percent are still proceeding directly to closing. Sellers with product on the market are adjusting ask prices downward already according to 73 percent of survey responders. The survey showed an uptick from sellers looking to close sales, including offering seller debt financing and preferred equity to buyers.
New hotel investment parameters
Seventy-nine percent of new hotel purchase and sale contracts (PSAs) are anticipated to have debt financing contingencies added. Also, expect longer due diligence periods in any new PSAs executed in the coming months.
Currently, the CMBS (collateralized mortgage-backed securities) market has stalled, with 83 percent reporting an inability to get debt quotes. Historically low hotel interest rates are anticipated to survive the COVID-19 pandemic and 39 percent believe we will see an increase in refinancing activity later in 2020. Of concern is how hotel appraisers are recognizing current values in appraisals. Forty percent of investors believe appraisals are still coming in higher than lenders and buyers are using in loan underwriting.
Government Comandeering Hotel Assets
Forty-three percent of the survey respondents anticipated issues with federal or state governments potentially commandeering hotels for use in housing patients or for other related purposes.
Recession in 2020
Assuming a recession is academically defined as “two consecutive quarters of negative GDP growth” hotel investors believe 2020 is the recession year. While an end to the greatest 10-year bull run in hotel investment history, positive sentiment exists that the overdue unfortunate reset will be the beginning of a new exciting upcycle due to a relatively quick rebound.