A city law that restricts the owners of large hotels from converting more than 20 percent of the building to other uses is a slap in the face to already struggling hotel owners, according to some industry bigwigs.
“It’s an insult to owners who are having a tough time,” said Lawrence Wolfe of Eastdil Secured of Local Law 50, speaking Monday on a panel at the NYU International Hospitality Industry Investment Conference at the Marriott Marquis. “Many are looking for options for change of use. It’s having an impact on owners of larger hotels who are trying to create value for themselves in a tough environment.”
The law, which was enacted in 2015 and looks to be renewed for an additional two years thanks to support for the legislation from City Council, prohibits owners of hotels with more than 149 rooms from converting more than one-fifth of the building to residential, for instance. Wolfe called the rule “nefarious” and said it was a “raw nerve” for the industry.
Still, some said that the law is having less of an impact than it might have had a couple of years ago, due to a dip in the luxury condominium market. “The window in residential right now is closed,” said Wolfe’s fellow panelist Jeffrey Davis of JLL’s hotels group.
On the whole, the panelists, who also included Kevin Mallory of CBRE’s hotels team and Pete Dannemiller of Hodges Ward Elliott, agreed that the New York hotel market was still struggling from low RevPAR and escalating expenses, though some said that dynamic may begin to shift as supply trails off. They also noted that hotel REITs were dipping their toes back in the market after a hiatus.
“Being a hotel owner in New York over the last few years, it’s been really disturbing the numbers we’ve seen,” Wolfe said. “The locals are coming in and getting price per keys at a deep discount to replacement cost. In some cases, they’re buying a hotel at what equated to the land value. We are getting deals done but it’s taken some repricing and you have to have a horizon that’s a few years out.”
Part of the problem appears to be a shortage of prospective purchasers — and the difficulties of wooing office and residential investors into the hospitality arena.
“We seem to have a smaller and smaller universe of buyers out there and they’re the same buyers and sellers we’ve always had,” Davis said. “We have to figure out what’s the next generation of capital.”
To that end, Wolfe said he sees more potential investment coming out of Japan and the Gulf States, despite the news of the day. (Egypt, Saudi Arabia, Bahrain, the United Arab Emirates and Yemen all said they’d sever ties with Qatar Monday, suspending diplomatic relations and cutting off travel routes.)
Davis wasn’t so sure: “It poses a big question,” he said. “The Qataris were big buyers of U.S. real estate. Is that going to stop now?”
Still, hotel owners have one things in their favor — the strength of the refinancing markets. While sales are slow, lenders are picking up the slack with favorable refinancing rates, the panelists said.
“Given the weak performance in New York, we’re always wondering why there aren’t more foreclosures,” Wolfe said. “The only way to explain it is that institutional owners also have debt funds that are willing to lend to take out capital structures from 10 years ago.”
The wave of expiring CMBS that was slated to take the industry by storm has simply not materialized thus far, Mallory said.
“It hasn’t been an issue at all,” he said. “Debt financing is competing easily against the sales process in today’s market.”
Dannemiller agreed, saying, “The debt markets are wide open.” “We’re seeing tremendous interest in assets we’re refinancing. Last week, we had bids from 18 lenders — and 27 different bid combinations — on one deal.”
In some cases, lenders are even coming into assets with negative cash flow, Davis noted.