Not Distressed But ‘Stressed’: Investors See Hotel Buying Opportunities Coming
Last week, a foreclosure notice was filed for one of the most high-profile hotels in D.C.: The Waldorf Astoria at the Old Post Office building, formerly the Trump International Hotel.
The property's leaseholder, CGI Merchant Group, defaulted on its $285M loan in February, and a foreclosure auction is now scheduled for next month.
The situation could be an early sign of distress barreling toward the hospitality sector locally and nationwide, panelists said Thursday at Bisnow’s Mid-Atlantic Hospitality Summit, held at the Washington Marriott Capitol Hill.
"That's not going to be the [last] deal that we are talking about and are familiar with that is heading to either auction or taken back by the lender in this market over the next couple of months," said Excel Group principal Matt Wexler, previously a managing partner at D.C. hotel developer Foxhall Partners.
In an environment where it is hard to capitalize on new developments, hotel executives said the most opportunity is in acquisitions. With the Federal Reserve keeping interest rates high, they said buyers are likely to see steep discounts as owners have no choice but to sell.
"Ultimately, I think the higher-for-longer approach is going to facilitate what I would call a stressed market — not a distressed market," Peachtree Group Senior Vice President of Acquisitions and Dispositions Michael Bernath said. "Where you have people that have been holding on because of debt maturities, because of impending debts, they’re going to just have to kind of bite the bullet and say 'you know, we’ve done everything we can, we’ve got to sell.'"
Many property loans that were financed at historically low interest rates three or four years ago are now coming due, with rates multiple times higher, LW Hospitality Advisors co-founder and President Daniel Lesser said.
"There are plenty of markets now where we’re starting to see a lot of hotels are coming up for refis, and there’s a lot of refinancing of assets going from a 3% interest rate to 7, 8, 9, even double-digit interest rate sometimes on these refis," he said.
"And so you’re going to probably create some opportunities, and you’re going to start to see a lot more hotels for sale," he said.
The sales haven’t started to swell yet, Lesser said, because interest rates are holding the bid and ask too far apart. But he said if rates start dropping even "a little bit," buyers will come running.
While the Fed has held interest rates steady at 5.25%-5.5% since last July, last month's inflation report preserved hope for cuts to commence this fall.
Sales will be the primary tool for dealing with distress, panelists said, because many lenders aren't looking to take control of a property.
"Banks aren’t in the position to take back assets," Bernath said. "That's not the goal."
And even if they wanted to take control, executing a takeover is more difficult than it looks on paper.
"It's not as easy as most lenders think it is," Pebblebrook Hotel Trust Senior Vice President of Asset Management Kari Carr said. "And most of them don't realize how difficult it is, even if they're developers, to transition their team on the debt side to the equity side."
Wexler added that lenders taking back an asset often isn't healthy for the property, as they aren't equipped to deal with renovation, capital expenditure or any other issues that arise.
As opportunities surrounding office conversions proliferate the buyer dialogue, the strategy of acquiring distressed hospitality assets and repositioning them may be the dark horse waiting in the wings, Lesser said.
"It’s going to be very interesting in the next six months to 12 months to see refis coming up on these hotel assets and what kind of opportunities there are," he said.
