Boutique hotel investor optimism comes with caveats

Boutique hotels remain a relatively preferred asset for real estate investors. But in recent months, it’s become harder to get deals done, and certain types of projects are gaining more favor than others.

“For boutique hotels, we’re really positive about the outlook,” said Amanda Hite, president of Hotel Data Tracker. STRas he spoke on Wednesday at the Boutique Hotel Investment Conference At New York.

Many boutique hotels saw profitability surpass 2019 levels. In April, U.S. boutique hotels posted average gross operating profit per available room of around $113, up 19% from April 2019 , according to data from STR.

“Even if there is a recession, business travel comes back and overlaps with the performance of boutique hotels,” Hite said. “You also have a resumption of international travel. Both will support the segment.

Hite also brushed aside fears that rising gasoline prices could dampen demand.

“We have over 30 years of data showing no correlation between rising gas prices and hotel demand,” Hite said.

Inflation becomes a brake

Still, while the big tailwinds for boutique hotels remain bullish, the positivity is not spread evenly.

Rising construction costs caused misfires.

“For 26 years, I underwrote hotels in front of investment committees, and no one ever asked me, ‘What’s your inflation assumption on your spending? “, said Clark Hanrattie, partner at HEI Hotels and Resorts. “Now it’s the first or second question.”

Inflation uncertainties add friction to construction financing.

A concrete example : Cedar Capital Partners, which has invested in hotels that collectively have nearly 2,000 rooms in the United States and Europe, had recently spent 10 months pursuing development of a condo hotel in Miami Beach’s South Beach neighborhood. In February, it was ready to begin the final renovations. But then bids for the work came in from contractors that were much higher than expected.

“We have decided to put the project on hold,” said Ben Leahy, a Cedar Capital partner, during a speech at the event. “It was a tough decision to take a break because Miami fundamentals have outperformed other markets so much.”

Leahy’s team is betting that a slowing U.S. economy will help drive construction prices down about 10%, or a similarly more acceptable level, by fall or the end of the year. year.

The hot market for hotel construction could cool down as lenders worry about a potential economic slowdown that will hurt their performance.

“Some lenders are still negotiating construction debt, but it looks like pricing has widened and they generally tend to be quite selective,” said Adam Maisel, director of Ramsfield Hospitalityhotel finance specialists.

Over the past two months, the credit environment has become more challenging for hotel acquisitions and refinancing, a few panelists said at the conference. The switch wasn’t a deal breaker for experienced players, but it did cause some delays.

Those last weeks, Global Apollo Management faced a lender that was reluctant to accept financing terms for a hotel deal, Apollo partner Jason Ourman said. The lender had concerns despite Apollo having the expertise gained from investing billions in hotels over the years and with the backing of financial titan Brookfield.

In some cases, unusual demand trends put investors and hotel developers at odds with each other.

“The cycle has been so geared towards growing leisure demand that some developers are saying we should get rid of meeting spaces for good,” said Robin Kennedy, executive vice president and chief development officer at International assembly.

“But what if business travel fully rebounds?” Kennedy asked. “You have to make your real estate decisions based on long-term trends.”

Bargain hunting

Some investors are looking for bargains due to market turmoil.

One opportunity is the handful of city hotels that are ditching the flags of global brands and going independent, Clark said.

Franchise agreements typically include a provision limiting damages in the event of termination if a hotel’s revenues fall below a certain multiple of the franchise fees. The pandemic has caused many hotels’ revenues to plummet, allowing them to break their franchise contracts for what are effectively lower kill fees than would otherwise be usual. In some cases, a property may become more attractive to certain investors as a free agent.

In Europe, some families have owned hotels for generations but are now facing financial difficulties. For these hoteliers, patience is running out for a full restoration of profitability.

“This presents a unique opportunity for investors to get their hands on these properties at relative prices,” said Eric Jafari, director of development at the hotel developer. Edyn.

More broadly, some boutique hotels could benefit from recent market disruptions. A funding slowdown that reduces development or conversion pipelines could lead to less competition in 2023, helping to support the pricing power of already existing boutique hotels.

“Supply has a huge impact on hotel performance,” said Adam Maisel, Director of Ramsfield Hospitality. “Slowing down the pipeline would be beneficial. It’s Econ 101.

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