U.S. Urban Market Opportunity
U.S. Urban Market Opportunity
There may not be a better time to buy a hotel in a large, high-barrier market.
Lenders and other capital stack participants (think EB5 investors) are becoming increasingly impatient as the recovery in the largest U.S. hotel markets crawls toward pre-pandemic RevPAR levels.
According to a CBRE report, at the end of 2021, the top markets are projected to finish 2022 almost 19% below their 2019 RevPAR level. Meanwhile, many tertiary and resort markets are fully recovered. To further illustrate the point of a slow recovery in these major markets, New York and San Francisco are not projected to achieve 2019 RevPAR numbers until 2026 and 2027, respectively.
Lenders have been flexible during the two years of the pandemic but see a long and winding road ahead for full recovery in some of these larger markets. To further exacerbate this dilemma, many hotels have raided reserve accounts and don’t have Capex money to stay competitive in the market. Lenders have no appetite for increasing loan amounts or refinancing the properties without realistic income projections that would support repayment.
Forced sales or available banknotes are more likely to come on the market (or off-market) in the coming months as loan committees get tired of hearing the same story repeatedly. This will create significant opportunities for well-capitalized groups with some creativity and patience.
A few words to the wise if you consider purchasing a big box in a major market:
➢ Location- the old saying comes into play in these markets, and the difference in a street or two can impact your RevPAR and, by extension, income.
➢ Basis matters- If you overpay, you cannot manage your way out of the problem. Get a quality property condition report in addition to the brand PIP (if applicable). Stress-test your underwriting assumptions.
➢ Consider other uses- It may make sense to reduce the box size by including another use such as apartments or condos. A smaller hotel is in a better position to drive the rate.
➢ Nothing like new- The newer the property, the less likely it is to need heavy CAPEX.
➢ Property Taxes- Hire a good local expert. In some major markets, property taxes have been skyrocketing in recent years with no end in sight.
A word about supply risk: The number of hotel rooms under construction peaked in April of 2020 at 220,000 rooms in the U.S. According to the STR pipeline report, at the end of 2021, the number was 20% less at 159,000 rooms. The number of rooms in final planning is also down 20%, but the number of rooms in the earlier planning state is up 39%.
The early planning number looks like a risk, but I observe that a large percentage of the projects in this phase will hit a wall when their construction pricing comes back. Replacement costs are running 15-20% (in some cases higher) than pre-pandemic levels.
For those with capital and patience, there will likely be opportunities to buy hotels in these previously coveted, high-barrier markets at prices that would have been unthinkable even a few years ago.