The path to recovery: 2020 will be a deal desert

Cash-rich vultures are already circling the world’s post-COVID-19 hotel industry, and they’re hungry. But they’re waiting until the dust settles to identify the best targets — and there’s little competition. “Whoever has cash in hand can go out and make a killing,” says Martin Smura, CEO, Kempinski Hotels, Geneva.

Don’t look for a feeding frenzy soon. “Nothing’s trading in the United States now,” says Michael Bellisario, director, equity research senior analyst, R.W. Baird. In his view, there’s stress but not much distress as lenders and hoteliers work feverishly on debt restructuring and forbearance to keep viable assets off the block, along with uncertainty about the timing of recovery. 

“Would you want to buy a hotel that might not have income for six months?” he asks.

Cleaning the lobby of Hilton's Curio Xiamen, China
Cleaning the lobby of Hilton’s Curio Xiamen, China

Contributed by Mary Scoviak

Government support in continental Europe will increase near-term survival rates. Still, in April, Cushman & Wakefield reported that, while 51% of hotel investors “had everything on hold” due to internal decisions or restricted access to financing, 41% were continuing with well-advanced deals or seeking distressed assets.

China could be ahead of the curve, as it was with occupancy recovery. While the number of deals was “muted” in the first half of 2020, “we expect hotel transaction activities to resume towards the end of the year as private equity and institutional investors still have pressure to deploy capital,” says Ling Wei Tan, vice president, investment, hotels and hospitality group, JLL Greater China, in his recent transaction report; also, several large hotel deals are on track to be completed this year.

In the U.S., Trepp LLC reports roughly 3,000 CMBS loans are backed by hotel mortgages worth more than U$86 billion in remaining debt. By mid-April, three CMBS hotel loan portfolios that include 186 properties and a US$2 billion outstanding balance were put into “special servicing.” If there’s no workout, that could put some strong brands in appealing sectors (such as extended stay) closer to the block.

Jon Bortz, chairman, president and CEO, Pebblebrook Hotel Trust, Bethesda, Maryland, foresees some “huge” portfolios of select-service properties coming to market alongside overleveraged assets. What about convention hotels? 

“Those big boxes are owned by large institutional investors who have big money. They will get to the other side,” Bortz says. “Small owners have less flexibility. Hotels need constant capital infusions to be maintained, and some of the smaller owners won’t have it to reinvest. When their hotels reopen, they’ll lose share [to renovated properties] and have to lower their pricing. That will lead to a lot of distress and a lot of turnover. But I think it will be another year before the folks who have capital take advantage of those opportunities.”

It will be at least early 2021 before potential buyers get a clear picture of what’s coming to market. “Banks don’t want to own or sell, so they’re working with hotel owners to find ways to prevent that,” says?C. Patrick Sholes, managing director, Lodging, Leisure and Gaming Equity Research, SunTrust Robinson Humphrey.