A new flash survey by LIIC-In the light of COVID-19, the Lodging Industry Investment Council presents an overview of the fast-changing hotel investment market and a comparison with the first flash survey conducted in the think tank on 15 March.
The flash survey was conducted by Mike Cahill, LIIC co-chairman and CEO / founder of HREC — Hospitality Real Estate Counsels, and HREC senior members James Few and Christian Walsh.
Here are results from the latest survey:
- Over a year for hotel-level cash flow: 91 percent of LIIC members now agree that COVID-19 ‘s net operating income effect will not normalise (return to 2019 cash flow performance) for at least another year in a significant shift from the previous survey. In the past, 75% predicted complete standardization within one year.
- Recession is here: 94 percent of respondents agree that 2020 will be viewed as a year of recession. With sadness it is time to say goodbye to our lifetime ‘s biggest 10-year hotel investment cycle.
- Currently, 57% believe it is time for the purchase letter to be sent for new hotel purchases, a 21-percentage-point rise from just 40 days ago, of 36%. For contract hotels it is consistent that the contract should be extended by 75% of buyers, which shows that investors still want to close transactions. 86 per cent of respondents believe that a buyer is entitled to retrade, if necessary, a 14 per cent increase from March ‘s findings due to the expected short-term cash flow effect. The question is, “how will sellers respond to a desired price change?” While 64% of investors report that they are still cautiously taking up new house investments, 74% are simultaneously waiting and seeing. Shoppers compared to real buyers?
- Crossing hurdles for closing transactions? – Two dominant concerns that may hinder a return of a healthy lodging transaction – traditional debt funding frozen and the closure of the bid / work spread between buyers and sellers – were found through both the March and April surveys. The amount of the necessary price adjustment for a closed transaction from February 2020 is still in flux. Even once the amount of reasonable price discount has been quantified, buyers still have the question of whether sellers are going to allow their assets to trade at the new price or will choose to only hold them. Strong ratings claim that hotel investors are innovative with 20% of seller debt funding and 15% of sellers giving buyers preferred equity investments. In addition, hard-money lenders with 8 to 9% interest rate bridge financing are stepping up quickly.
- Hope for the debt to get more active: 87% of new acquisition and selling contracts are anticipated to be added in tandem with longer due diligence debt funding contingencies (mainly non-existent over the last five years). The April survey reveals investors’ worries about the pace at which hotel lending has returned, at 72% expecting no growth in refinancing in 2020, a 49% rise in negative results in March. The collateralized mortgage-supported securities market is still in stagnation with 86% of purchasers and refinancers reporting unable to receive debt quotes.
- There are still three main threats to hotel investment: COVID-19, a predicted economic recession and a decline in domestic and leisure travel.
- Further lowering of hotel transaction rates for the calendar year 2020: In the last 40 days, investors in the overall hotel transactions market have been overwhelmingly pessimistic. In LIIC’s March study, only 9 percent agree that the overall U.S. dollar amount of hotel transactions in calendar 2020 will be reduced by more than 50 percent over year-end 2019. Today, the proportion is 32%. The overall asset expected to be sold by year-end 2020 is expected to decrease by more than 50% by 36%. Furthermore, 25% expect a smaller decrease in the amount of traded assets (10% to 20%), and 30% foresee a spike from 25 % to 50%.
- The CARES Act and Payroll Security Program: 61% of survey respondents are favorable in their representation of the CARES Act and the PPP portion in Trump administration. 27% assume execution was above average and 33% found it good and bad as anticipated.
- Hotel asset values drop: The decline in the theoretically perceived value of individual hotel assets from 28 February 2020 to 25 April on average is noteworthy. 40% of investors believe there has been a decrease of more than 30%. 25 percent of respondents expect a decrease from 10 percent to 20 percent; similarly, 20 percent to 30 percent decrease.
- Sales of REO properties in 2021 and 2022? : Real estate owned by borrowers is increasingly being debated as a target category for hotel buyers. 56% believe that the wave is coming and lenders will take over the hotel assets. However, 44% believe that this REO wave is not going to materialise as “extend and pretend” kicks are taken and loans are made without foreclosure.