ATLANTA — Virtually every industry in America has been impacted by the pandemic, but tourism has been among the hardest hit as travel has all but evaporated.
The industry has since come back to life, including in Las Vegas, although it still hasn’t recovered all the business it lost.
A panel of industry professionals gave their thoughts on hotel sales and development, travel and other issues last week at the National Association of Real Estate Editors’ conference in Atlanta.
The Review-Journal moderated the discussion with Charlotte Kang, national practice lead for hotels and hospitality at real estate brokerage Jones Lang LaSalle; Michael Ritz, senior vice president of investments at Peachtree Hotel Group; Ben Brunt, chief investment officer at Noble Investment Group; and T.Jack Bagby, director of architecture and design firm Cooper Carry. This conversation has been edited for length and clarity.
Review-Journal: The first thing I want to talk about is the impact of the pandemic on travel, tourism, conventions and the hotel real estate market. Take us back to those scary days of spring 2020, when the economy shut down and travel stopped.
brunt: We had a portfolio of around 50 assets at the start of the pandemic; we went to 2 (percent) to 5 percent occupancy in our portfolio in April 2020. It’s a bit of a blur to look back on that period. We were looking for all the traveling nurses, government related demand, anything that would generate revenue for our hotels. Most of our assets had 35 to 50 employees, each hotel was reduced to a small team of around three to six people. It was a very difficult working environment for all these people. The person checking you in was probably cleaning your room, doing the laundry, and preparing the food. (At the corporate level,) we certainly had a lot to deal with. You had to modify every loan; we chose to participate in some PPP loans. So there was a lot of paperwork, loans, investor calls, etc.
Charlotte, can you talk about the sales pipeline and what happened to all the deals that were going on across the country when the pandemic hit?
kang: It was a very scary time. Sales that were being negotiated have been delayed, but we have seen some sufficiently advanced sales that have taken place. But at the time, everyone was trying to figure out what was going on and how the industry – as owners, lenders and operators – is preparing for what might happen. It wasn’t until later, when the vaccine was about to roll out, that we saw pockets of areas, especially areas open to travel, where transactions started to take place.
Did you and your team even attempt to do assessments in this time when hotels were closed and no one was going on vacation?
Kang: We have certainly attempted to do so; our customers asked us to do it. I was on the phone every day – almost felt like every hour, every half hour – and our job was to get as much consensus as possible from market participants and get Information: If you were to buy the property today, what would you be willing to pay?
Ritz: Ninety percent of our business became an asset management practice, where we were trying to communicate with all of our lenders, our investors, to keep everybody informed, and also to be on the receiving side. One thing that was a bit different was that the remaining 10% of our team went into capital markets and we raised funds. Fears were growing, people were liquidating their positions in the stock markets, trying to shelter cash. No one knew what the future of their investments looked like. Our executives founded the company in 2008 on buying distressed debt and saw an opportunity to potentially buy distressed debt and invest in assets at lower valuations. We ended up spending about a billion and a half dollars through 2020 and mid-2021 to buy hotels, do bridge loans, construction loans. Essentially, while the market was off, we were trying to place capital in a dislocated environment.
T.Jack, can you tell us about your industry? Have offers disappeared for hotel works, or have you seen hotel owners looking to change the interior to accommodate what’s happening with COVID, like adding new HVAC systems?
bagby: Around April 2020, I would say that about 60, 65% of all our jobs that were on the boards of directors were suspended. There were individuals and family investment groups trying to time the market, and some came to us to try to start the design work. But for the most part the industry has really dried up.
Last year, historically low mortgage rates fueled a home buying frenzy across the country. With tourism picking up in 2021 and cheap money widely available, was there a similar surge in hotel purchases last year?
brunt: Yes, there was a significant amount of deal activity from the start of 2021 through at least the first quarter of 22. The deal environment was really fueled by the ability to forecast, and the rates of Interest was certainly at an all-time low, and lenders were eager to get back in the game, which sparked a lot of deals.
Can you explain to us how the sharp rise in interest rates this year has had an impact on the financing of hotel construction or on hotel sales?
kang: For very good quality assets, very well located, we always see very strong interest from buyers. If you have a well-located asset with strong fundamentals in a strong economic environment, those are very resilient so far.
Can you also talk about the hotel construction pipeline we’re seeing across the country, particularly how it compares to the years leading up to the pandemic?
brunt: What I read recently, and that’s through Lodging Econometrics, a New Hampshire-based group that tracks new construction, what they’re reporting is that housing starts are down by 40% compared to the same period in 2019. Whether it is a combination of interest rates, but also an important element is inflation and the overall cost of construction. When you combine that in a tough supply chain environment, it makes building harder.
bagby: The supply chain is a part of it in terms of construction costs, but it is also the labor. You see a major shortage of skilled workers, so it’s getting harder and harder to schedule sub-contractors on jobs, and so the price, of course, goes up. While we can fix the supply chain issues, I’m not sure we’re going to fix the labor issue very quickly.
Kang: Debt financing is also more difficult to obtain.
Ritz: And will only get harder.
Why is that?
Ritz: High rates. The Federal Reserve is committed to lowering inflation, to cooling the economy. If they continue, and they succeed, then we should see high rates. These rates, as they continue to rise, the cost of capital for debt providers and users must rise in parallel. We’re getting to a point where the cost of debt is approaching the cost of equity, and then the transactions aren’t done in pencil. So that’s the kind of time you get a faucet going off.
How has the pandemic affected hotel interiors or the innards of a hotel?
Bagby: Some of the only lingering effects we’ve seen from COVID is this focus on wellness. It started before the pandemic, but it really picked up steam with the pandemic. This idea of working in the hotel more connection with the outside, whether it is bringing the outside through greenery or more windows, or having a physical outdoor space. We have seen more outdoor lounges, outdoor meeting spaces, also trying to maximize the use of spaces around the hotel, realizing they can monetize those spaces.
How is domestic travel in the United States and how does leisure travel compare to conventions, which, at least in Las Vegas, have been slower to emerge from the pandemic.
Ritz: I think a lot of our eyes are on the business traveler. It was such a big part of our revenue streams before COVID. Returning to the office is big talk, but how much of a return is business travel really? It’s come back a little faster than expected, but it’s not necessarily the huge consulting firms that everyone thinks are back on the road. It’s the smaller, hungry new start-up companies – there are two people on the road, not eight, but there could be six groups of them who are going to compete for this company and come before one of their potential new customers and have a face-to-face interaction.