June 22, 2021 12:34 pm
SOLD OUT!!!………most owners of hotels like to hear that term when it relates to their own hotel. However, at Leisure Real Estate Advisors, that term applies to our listing inventory. If you have given thought to selling, or in the least, have contemplated getting an opinion of value, we would love to hear from you. The market is recovering and it is active……read on.
Within the last 90 days, our firm has closed 8 deals, with several others pending. A quick view of our website, shows that we have very little product remaining in our listing portfolio. Closings are occurring and our marketing activity (inquiries from buyers) has been as strong as we have ever seen it. While it is reasonable to believe that selling during a time of distress will not produce the desired price point, please read on.
While hotel revenues and valuations have been affected by every downturn since the 1980’s, the Covid-19 effects were dramatic, and much more so than the previous economic crises. The Covid upheaval was dramatic, sudden, and with no warning. For 6 months or so after the beginning of the pandemic, valuations were very difficult to determine, mainly because no one really knew how long this virus was going to impact business. Then it became obvious…………the vaccine would be the key, followed by a dramatic decline in Covid cases.
One could certainly say that valuations will not reach 2019 levels for a while, and we don’t disagree with that premise. However, there are a number of other market factors that could very well accelerate sales activity. Please consider the following:
- Revenues in most markets are up considerably compared to 2020, and approaching 2019 levels. This type of recovery bodes well for valuation recovery.
- Construction costs have increased dramatically since early 2020. Resale investments will now look a lot more attractive, especially on a price per key basis.
- A corollary to the above bullet is that construction for new competition has slowed, because of the Covid impact, but also because the construction costs have made it more difficult for projects to underwrite. ADRs received dramatic pressure over the last 12 months, and no one really knows where they will end up in 12 – 18 months, which complicates the underwriting. For right now, the threat of new competition is as low as it has been since 2010.
- If a hotel can survive the worst economic crisis since the Great Depression, then investors might be more comfortable with the risk. They know it was painful, but they also discovered how to modify operations and survive
- The mass foreclosures and bankruptcies that were predicted in 2020 did not come to pass. Certainly, there were some issues, but not to the extent predicted. Recall 2008-09, when it took years to flush the system of all of the foreclosed assets and that backlog affected values for years. We do not foresee that backlog this time, which should equate to a quicker valuation recovery.
- There is a lot of “dry powder” in the marketplace, waiting for investment. A lot of that money was raised to buy assets at discounted prices. While some of that activity did occur, it was not widespread. That means there is still a lot of equity available to chase deals, and historically, that equity has gotten placed.
- The debt that has been incurred by the federal government will eventually put pressure on interest rates. It is interesting to note that when rates decline, values do not rise in the same correlation. However, when rates rise, values do tend to decline in correlation to the rise in rates.
The ultimate goal of the preceding bullet points is to provide you with an update to the current investment climate and to let you know that the market is active right now. Lenders are returning to the arena and SBA terms are certainly favorable. Right now, SBA loan origination is paid, and the SBA pays 3 months of P&L (capped at $9K/month). If you would like to discuss the marketplace or a possible exit strategy, we would enjoy visiting with you.