Maturing Debt, World Cup Present Prime Buying Opportunities For Atlanta Hotel Investors
Many debt-strapped hotel owners who also are getting pressure from their brands to pump more capital into upkeep could be forced to sell this year and next, opening up a big opportunity for commercial real estate investors hunting for opportunistic buys.
Nearly $6B in CMBS hotel loans are set to mature this year, most of which were handed out before the pandemic when interest rates were less than half of what they are now. The pandemic's dramatic hit to hotel performance led lenders to extend many of those loans, but those days are coming to an end, and refinancing will be difficult at such higher rates.
Now many of these owners are being forced to sell to wipe the struggling hotels off their books — to the benefit of new investors, Woodvale Managing Partner Rahim Charania said at Bisnow's Atlanta State of the Market event last month.
Charania said that his firm recently closed a $100M fund to buy distressed and value-add real estate, and he expects to invest a good portion of that fund in hotels.
“Through our due diligence, what we've found is low-hanging fruit is right now in the hospitality sector,” Charania said onstage at the Hyatt Regency Atlanta. “If you haven't done your [property improvement plan] in a while, you've got the franchise company yapping in your ear the whole time telling you to do your best. So yeah, I think all of those could create an opportunistic time to buy hospitality.”
Satori Collective co-founder Andy Chopra said the need to dump capital into renovating and refreshing hotels at the behest of brands like Marriott and Hilton is causing an inflection point for owners who have hung on to this point.
“You have to make a tough decision,” Chopra said. “Is this a good-money-after-bad exercise? Am I better off pulling whatever equity I can out today through a sale and redeploying that by capitalizing on another borrower’s pressure points?”
Hotel investment is predicted to jump this year, with 50% of investors expected to increase their purchases of hotels in 2024, according to a CBRE report that surveyed more than 130 real estate investors. More than 70% of those investors said they were seeking value-add and opportunistic deals within the hospitality sector.
Capital that has been sitting on the sidelines as the CRE world adjusts to higher-for-longer interest rates has been expecting a deluge of distressed properties to hit the market. But Nexera Capital CEO Pete Patel said that likely won't materialize.
Instead, the opportunities will be selective and focused on certain markets, especially in the Southeast, which has weathered economic headwinds better than other areas of the U.S.
“The Southeast has been really strong. For most of our portfolio, the last couple of years have been the best ever,” Patel said. “People think there should be a flood of distressed assets. Obviously, I don't think it's going to be a flood, but definitely [there is] going to be some opportunities.”
Another factor making the hospitality sector appealing is the lack of available debt, which will help to decrease the pipeline of new hotel supply hitting the market, panelists said. While there is some debt for existing assets that are cash-flowing, banks have been tightening the terms on construction loans and increasing what they want borrowers to pay.
“It's really tough on the development side,” IHG Hotels & Resorts Chief Development Officer Julienne Smith said. “A major lender said, ‘If I don't have a relationship with you, please don't stop me after this panel because I'm not going to make a new relationship. We are only lending to those who we are familiar with.’”
That isn’t quite showing up in the numbers in Metro Atlanta. After a record year of new hotel development, with 151 projects encompassing 18,730 new rooms, developers announced more new hotels in Metro Atlanta in the last quarter of 2023 than any market in the U.S., according to Lodging Econometrics, with 16 projects encompassing more than 1,500 new hotel rooms. That was followed by Phoenix with 15 new hotels and Dallas with 14, according to the report.
Developers are unleashing new hotels not only in Downtown Atlanta and near Hartsfield-Jackson Atlanta International Airport but also around coming manufacturing hubs, including SK Battery America’s plant and Rivian's electric vehicle plant, HVS recently reported, although Rivian's plans have been put on ice.
But that new supply has dented Atlanta hotels' performance, which also was dragged down in the first quarter by inflation.
But many panelists at the event said Atlanta hotels will be getting a huge financial boost in two years when the city hosts eight FIFA World Cup 2026 matches, including a semifinal. The games are expected to draw 300,000 out-of-state visitors to the region and lead to an economic impact in excess of $400M.
While Patel said his firm is holding back on previously planned hotel developments, it’s a different story for his firm in Atlanta, where Nexera is developing a 183-room Moxy by Marriott hotel in Downtown.
“We’re developing here in Atlanta. It made sense. We feel the Downtown market is really strong,” Patel said. “And obviously, we’ve got a major event coming here two years down the road.”
Beyond hospitality, the World Cup games could also have a long-term effect on Atlanta’s international reputation in the way the 1996 Summer Olympics did, said Jerry Parrish, chief economist at the Atlanta Metro Chamber.
“Having the Olympics here in ‘96 literally put Atlanta on the map for international relocations. It's like nobody had ever heard of it until we had an Olympics here,” Parrish said. “We'll see another bump like that.”
