what is the future outlook and demand for the hotel sector amidst this whole COVID-19 outbreak? there will be many bankruptcies of hotel operators and foreclosures on hotels which will result in cheaper pricing but who will purchase them now that we've seen the risk of the asset class first hand during a pandemic? opportunistic funds and investors? would you or your firm consider buying a hotel for 30-50 cents on the dollar? any insight to how the dynamic of the hotel market will change for the next upcoming years?
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If you’re just looking for opinions look at the rating agencies outlooks. Negative in the near term. Outside of that, who knows.
Of course people would still buy hotels...it's a black swan event, a once in a 50-100 year occurrence. It's bad luck that a virus transferred to humans. Won't change hotel investing for anybody with a long term view and common sense. If anything, this is going to create a solid buying opportunity becuase a number hotels were largely overvalued trading at ridiculous cap rates.
Not all hotels trading at ridiculous cap rates. Check out this 23 cap I just found: https://www.loopnet.com/Listing/102-S-Main-St-Scott-City-KS/12276420/
Hotels have always been consider the riskiest/most volatile asset and thus have always traded at higher cap rates than other property types. Lending on hotels has also been much more conservative with many lenders topping off 5-15% LTV/LTC less than for other property types with higher DSCR and DY requirements.
Some associated risks: 1) Most volatile cash flows that are very sensitive to the economy. Little to no staying power. 2) Seasonality (in many markets, winter occupancy and ADR are half of those in the summer months; imagine what would have happened if the coronavirus hit in June) 3) Supply Risk (low barriers to entry) 4) Business/Non-RE risks. Franchise could open up a nearby hotel which could impact market penetration. Poor management. Etc. 5) Other risks. Corona, 911, irregular weather etc. 6) High fixed costs 7) "Seasoning"
The upside: 1) High cap rate 2) Upside could be near immediate on bridge transactions (no need to wait out any leases) 3) Many applicable business strategies allow for more creativity in unlocking upside 4) High fixed costs act like leverage. (Ex. Rev is $1MM, exp weight 65%, NOI is 350k. If Rev goes up to $1.1MM largely due to higher market prices and expense go up only slightly due to a slight increase in occupancy to around $682k or 62% of new revenue, then NOI becomes $418k which is a 19% increase.)
I personally think that hotels will be the best performing asset class coming out of this crisis since the coronavirus is a temporary event that is unlikely to repeat itself or cause long lasting fundamental damage.
This is why hotels trade at 8% + caps. The risk is priced in (in theory), although this is an EXTREME downside scenario, about as bad as it gets, to balance out the historic RevPAR growth cycle of the last ~9 years. General industry sentiment was a downturn is coming and here we are. It is brutal right now and my thoughts are with everyone in the industry - hope you all have some cash reserves and hunker down - but also people have short memories, i can see business getting back to 'normal' (definitely some adjusted pricing, will be tough to get buyers and sellers to see eye to eye for a while) in a year or two.
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