Hotel Market and Repositioning…
In April, NW Hotel Investor attended the Northwest Hotel Investment Forum (NHIF) in Seattle, WA. The program’s topic was Repositioning a Hotel For Success, an appropriate subject given the current investment atmosphere. We took away some excellent thoughts about repositioning in today’s market.
Among other factors affecting buyers, prime opportunities for rehab and repositioning are coming into short supply. The “tired” assets that were once readily available in the early 2010’s have largely been acquired, particularly those in good locations and/or primary markets. Although showing signs of tightening, banks are continuing to lend. However, with low available inventory many buyers are struggling to find properties to purchase.
The investment atmosphere…
Nationally, new hotel supply is beginning to drive average occupancy rates down. According to a July 2017 article from CoStar, “The U.S. hotel sector continued to enjoy record occupancies through the second quarter. However, the impact from the large number of new hotel rooms being added finally had an effect as the average occupancy rate for U.S. hotel declined for the first time since 2009.” In the Pacific Northwest, the last year and a half has seen nearly 5,000 hotel rooms added to the market with many more coming through 2020. Even if our hotel market can absorb all the expected rooms, occupancy will be affected as the market adjusts.
Hotel values are flattening and investors are finding it challenging to place their money in investments with good returns. Sellers can still expect to get a good price for their hotels, but it’s due to a lack of inventory on the market, not necessarily because values are still increasing. Buyers are finding it challenging to place their money for good returns, if they can even place it at all. This is especially troubling for buyers in a 1031 tax deferred exchange.
Repositioning is a viable way to create opportunity, and the transformation of a property can be very rewarding. Value can be found in timing. Back In 2008 and 2009, many owners did not invest in their properties. As a result, there were a lot of tired assets in 2010 and 2011, with some of these in prime locations. Right now, there is a slowdown in opportunity due to low inventory but, although some banks are tightening, debt is still available. If prospective buyers are unable to locate distressed assets in top markets, some great opportunities can still be found in secondary and tertiary markets.
As discussed by the panelists at the event, and from conversations with our clients, we think the following are some of the important points to consider for repositioning –
- Change of use from Apartment or Office to Hotel can be difficult because of possible zoning and entitlement issues. For example, a developer can expect to wait 5-6 years for entitlements in some markets like San Francisco. An investor / developer must be able to quantify and qualify these entitlements.
- Repositioning is often capital intensive. An investor needs deep pockets for renovation and can’t expect to invest for more than 65% in debt. Costs for new construction can be expensive (especially with the city) but there can be even more risk in taking on an older building. Once you are behind the walls, you get the real story about the building. You need to get a premium savings going in so that you can get paid for the risk. Of course, it is better to be in and fully repositioned at a lower cost than that of new construction.
- Repositioning can also be operational intensive. The property may need a change in management, and picking the right operational partner is essential.
- Finding diamonds in the rough is easier with good sources like existing capital partners with other assets. These partners can provide back door access based on their network and experience. Having a good track record with partners leads to more opportunities. Also, knowing brokers who bring knowledge of off-market opportunities can help investors locate good properties.
- Target markets with character and overall performance to reposition and create value. Sometimes you must drive the market by seeing the opportunity. The leadership must understand the market very well, often by having a more hands-on approach. To get a real sense of the market, talk to the experts: the brokers working on the ground, and the people in the community.
- Strong fundamentals over the past eight years have led to a robust development pipeline nationally and regionally. It is extremely important to do your research and understand what is in development in the area.
- One also needs a thorough knowledge of the Lodging market. Underwrite the property using STR and other hotel sources like owners, appraisers, franchisers, and other experts.
- When ready to purchase a property for repositioning move quietly and tie up the asset fast. It is good to go in-house quickly and have a short due diligence period. When possible, don’t make the deal contingent on financing.
- Walk the asset! Mechanical systems offer the biggest surprises and can be the costliest. Always expect surprises. However, if you can stomach the risk and you do your due diligence, there can be excellent pay-offs.
If you have a property that you believe might be good for repositioning, we have qualified investors from around the county looking for opportunities. Please contact Brian at 503-577-7710 or by email at [email protected]