You could feel the energy in the air at the Hunter Hotel Investment Conference in Atlanta last week. Hotel owners and investors gathered from all over the country were looking to make deals and raise rates. “I think people are recognizing that not only are things pretty good now in the lodging industry, but they’re going to get better, and it’s a fairly stable situation for the next several years,” said Steve Joyce, president and CEO of Choice Hotels, speaking on the president’s panel.
Another panelist, Todd Giannoble, managing director for Goldman Sachs, agreed and estimated that the industry wouldn’t peak until 2015 to early 2106. “I think we’re going to see interest rates tick up [before then], which will have an effect on cap rate,” he said. “So you may end up in a steady state environment where you have higher caps but on higher underlying performance because of what will happen with interest rates.” He noted that there could also be a plateau of relatively high valuations into 2016.
Sounding a note of caution, however, was Suril Shah, head of North America hospitality acquisitions for Starwood Capital Group. “The one thing that will have the biggest impact is government intervention—from minimum wage to immigration and monetary policy.” He pointed to a government report on the positive economic growth that came out a couple of weeks ago and caused the stock market to dip because so many people thought that financial easing would follow. “It’s scary that the impact of the government’s economic policy is stronger than economic growth,” Shah said.
Government interference in the economy was a hot topic at the Hunter Conference. “If the government stopped buying paper and reinvested in the infrastructure in this country—which not only needs it terribly, but it’s starting to impede our ability to move people around the country—and if we get real employment this year, you’re going to see our numbers start to move up even further,” Joyce said. “So as housing comes back and we begin to put people back to work, the economy is going to drive even better results for our industry.”
The bottom line, according to Joyce, is that “we have a pretty good three- to four-year run in front of us—really good if we get some help from the economy. We’re pushing hard to get people to start their projects now, so they have three or four good years with the wind at their back and also to recapitalize.” With the financing market improving so much, even local banks are starting to lend again.
The panel was in broad agreement that the sound fundamentals indicate how much the industry needs to raise rates. “Occupancy is now above pre-recession levels and demand is as high as it has ever been,” Giannoble said. “If we can raise rates, we can withstand the supply that’s coming.”
Shah bottom-lined the current market environment with a simple, “It’s time to take a bold step with your portfolio.” But he advised hoteliers and investors to avoid putting all their eggs in one basket when building out their portfolio. “You have to balance 10-year money with five-year money with floating with debt that you can pay back early,” Shah said. “If we’re talking about another recession, I don’t think you’ll have an issue with payment defaults. If you’re going to have a default, it’ll be from refinancing because the capital markets have closed up.”
Shah’s advice was picked up by Giannoble, who noted: “Your entry point, the way you buy, and the way you finance has to allow some flexibility and some uncertainty [if your exit becomes] five or six or 10 years, it isn’t life threatening. If you finance at the highest levels and you buy at the highest levels, and you leave yourself so little wiggle room with regards to something going wrong, you’re almost guaranteed to have a problem.”
He added, “If we can get the government to tell us what the rules are, then we can get back to job creation and real economic growth.”