Financing for Hotels: Do Lenders Have Any Room for the Inns?
By Carl Rizzo Partner, Cole, Schotz, Meisel, Forman & Leonard, P.A. | October 31, 2010
Co-authored by Christopher J. Caslin, Partner, Cole, Schotz, Meisel, Forman & Leonard, P.A.
As the commercial real estate market continues to gradual thaw from the ice age of 2008, hotels are making a modest return to the deal spectrum as evidenced by the recent trade of hotels in major US markets. Among the latest active players are DiamondRock Hospitality, Hersha Hospitality, Pebblebrook Hotel Trust and Chesapeake Lodging Trust. Pebblebrook and Chesapeake are the relative newcomers on the scene. Pebblebrook made news recently when it purchased the 422-room Intercontinental Buckhead in Atlanta from Intercontinental Hotels Group PLC in an all-cash deal for $105 Million and just announced that it was under contract to acquire the Hotel Monaco, a 183-room hotel in Washington, DC, for a purchase price of $74 Million.
Chesapeake arrived on the scene in June 2009 and, according to the company's website, by January 2010, completed their first public offering and by March of this year had closed on their first hotel acquisition - the 498-room Hyatt Regency Boston. Since then, the company has acquired a 188-room Hilton in Los Angeles and a 153-room Courtyard by Marriott at Disneyland in California for a total purchase price of $71 Million, and on July 6, announced it was under contract to purchase the Boston Marriott Newton for a purchase price of $77.25 Million.
Not to be outdone, DiamondRock bought the 821-room Hilton Minneapolis in June for $155.5 Million and Hersha closed on the 113-room Holiday Inn at Wall Street in New York for a combination of cash and partnership units totaling $34.8 Million.
So where are these and other investors finding the capital to fund these kinds of deals in what has been a relatively tepid market? And how are current owners dealing with the strain on maintaining debt service in a sputtering economy?
In general, lenders have been slowly returning to the table as they rediscover their appetite for commercial real estate. We have even seen in the last month a new collateralized mortgage-backed security "CMBS" offering from JPMorgan Chase and Ladder Capital Finance of bonds backed by 36 fixed-rate commercial mortgages which are secured primarily by retail properties in various states across the country. While it seems unlikely that CMBS deals will return to the pace and popularity they enjoyed up until 2 years ago, it is at least a positive sign that lenders are getting off the bench and back into the game. However, lenders continue to exhibit some reluctance with hotels as compared to other commercial real estate asset types. Unlike an office building or shopping center, the hotel business onsite must also be evaluated in addition to the real estate. Given the recent turmoil with the domestic economy coupled with the lurking threat of terrorism, the hotel business has taken some lumps. Each of the investors mentioned above have seasoned veterans who can steer an owner through a down economy. Diversity of location of hotel assets can help offset a slide in occupancy that may be experienced in a particular area of the country. As we have recently witnessed with the BP oil spill in the Gulf of Mexico, natural disasters can have a devastating effect on a regional economy, in this case the Gulf Coast, which relies to a large extent on tourism. Diversity of hotel products among luxury and full service, select service and extended stay properties have also provided some insulation from market swings driven by the down economy as consumers, and now business travelers, search for value pricing when it comes to hotel accommodations.