Is the hotel market under siege? Execs point to political climate as “a big concern”

Hotel investors at NYU’s annual hospitality conference say they’re hungry for good deals despite a slowing economy, rising costs and uncertain politics.

Local hotelier Richard Born of BD Hotels tried to capitalize on NYU’s International Hospitality Industry Investment Conference early: After registration on Sunday, Born hosted an exclusive invite-only event at the rooftop bar in his nearby Pod Times Square Hotel, complete with tropical drinks, hula dancers and a live band. Guests included IHG’s Robert Chitty and Proskauer’s Jeffrey Horwitz.

Born’s new head of acquisitions and development, Rani Gharbie, took some of the partygoers on a tour to see the hotel’s micro rooms in a bid to drum up interest from investors as BD is seeking to grow its current portfolio of five Pod Hotels to 50 in the next decade.

HVS president and CEO Stephen Rushmore, Jr. gave attendees in search of their next deal a message of caution.

“Times have been good. If you’ve been in the game, you’ve been doing quite well and congratulations,” he said. “But at some point in time the cycle is going to end. Probably, it’s going to be less than a year at this point.”

Rushmore pressed on: “As you get later in the cycle, [investors] end up really sharpening their pencils to make deals work and when they do that, they sometimes end up cannibalizing themselves.”

He pointed to nightly resort fees, which typically increase the value of assets but are paid for by leisure traveler. The practice pits investors against consumers, he said.

In a later panel, executives from Starwood Capital Group, Blackstone, Apollo and KHP Capital Partners, painted a picture of hospitality under siege.

For Apollo’s Tracey Gamble, trade wars and immigration policy are “a big concern.”

Immigration reform would likely impact “our labor supply and the types of labor,” she explained. And Apollo does a lot of renovation projects, sourcing materials from China and Mexico, she added.

Joseph Long from KHP Capital Partners echoed the sentiment. In a current project, he said his team ordered all furniture from a manufacturer in Mexico instead of China to avoid the conflict.

“We wake up one day and all of a sudden there’s a tariff on Mexico. We’ve already placed these orders so what do you do?” he asked.

“There’s kind of a long list,” said Scott Trebilco, Blackstone managing director. He pointed to the growing presence and power of unions, a tight employment market more broadly and changes in real estate taxes.

Insurance for extreme weather is also becoming a “huge problem,” according to Starwood’s Akshay Goyal. When it comes to underwriting for natural disasters, he said “that’s something we’re way off on. The one benefit… has always been resort fees. Just keep [adding] more and more resort fees,” he said, chuckling with the rest of the panel.

But the laundry list of challenges doesn’t mean those investment firms are backing off; they’re ready to do riskier deals so long as it fits into their “narrowed” definition of a good bet, according to Trebilco.

Goyal agreed: “It’s just a matter of having enough opportunities to get lucky, because there will be more than enough situations where you’ll get hurt.”

During an afternoon finance panel with top hotel brokers, Lawrence Wolfe, co-head of lodging at Newmark Knight Frank, said “equity is fickle… you need an either great re-positioning story or a significant yield” to get a deal done.

He defined the latter as an asset with cap rates ranging from 5 percent to 9 percent, or a “reasonable” cost per room and a “compelling business plan.”

“I think there’s a lot of frustrated capital out there chasing that high value-add deal that’s hard to find,” said Peter Dannemiller of Hodges Ward Elliott who was also on the panel.

Value-add could range from a renovation to collapsing a ground lease, selling off an attached asset like a parking garage or even restructuring a franchise agreement, according to Apollo’s Gamble.

“More of the return has to get generated out of the value-add component,” said KHP’s Long. “Because so little of the return is going to come from market growth.”

Correction: A previous version of this article incorrectly spelled the name of Proskauer Rose attorney Jeffrey Horwitz.