Occupancy Down, Opportunity Up? Online Auctions Show Surprising Sales for Hotels
Checking in on Hotel Bids Amidst a Historic Hospitality Downturn
In times of economic uncertainty, investors become more risk-conscious than ever. Development often slows; entrepreneurship takes a back seat to business fundamentals. From a commercial real estate capital perspective, a long-term triple-net industrial lease seems a lot more promising than a restaurant or hotel that might be fully booked one day and bring in zero cash the next.
But it’s times like these, even in the midst of a global pandemic that’s not showing any signs of abatement, that the greatest opportunities can present themselves – at least according to Bennett Webster, a senior managing director and partner of Paramount Lodging Advisors, who has been involved in the brokerage of more than 200 hotel assets over the last decade.
Hotels might just be the most volatile of all commercial real estate (CRE) property types – but hospitality asset sales have been surprisingly strong throughout the pandemic on auction sites like Ten-X Commercial (which is owned by CoStar Group, the publisher of LoopNet). To take a closer look at this phenomenon, LoopNet spoke with Webster about what’s driving this activity.
In late October, STR’s Hotel News Now (also owned by CoStar Group) reported that U.S. hotel occupancy had dropped – again – to below 50 percent. Based on this and other grim data, it may seem surprising that, around the same time, the hotel sector witnessed several rare, large transactions and platforms like Ten-X saw assertive bidding activity for hotel assets of all sizes.
Host Hotels & Resorts, for example, sold its 532-room Newport Beach Marriott Hotel & Spa in California’s coastal Orange County for $216 million through a traditional sale in September, in what represented the “biggest hospitality trade of 2020,” according to CoStar News. On the other end of the spectrum, a small, independent inn in Craig, Colorado, defied expectations and boasted a 21% boost in revenue for the month of September compared to the year prior, as it prepared for an Oct. 19 auction event on Ten-X. There’s also substantial interest in nonperforming loans of hotel assets through online auctions, Webster noted.
A Moment of Opportunity
While some investors might be wary of hotel assets in the current climate, Webster explained, it could also be the ideal time for opportunistic buyers to take a chance.
“Generally speaking, most commercial real estate right now is opportunistic,” he said. “But hotels are, in particular.”
Hospitality, he said, has “historically been a tougher asset class and one of the more volatile asset classes, because unlike a triple-net lease office building, you’re selling a property whose rate and occupancy adjust every night. And when you’re facing a situation like COVID … it creates even more volatility.”
So why do online auction platforms like Ten-X consider hotels to be one of the strongest propositions brokers can offer at this time?
The Benefits of Speed
The conversation with Webster took place in the lead-up to what turned out to be not just Election Day, but “election week,” which drove the point home even further.
“With the news cycle now, the days might as well be years,” he said. “It’s not a time that most folks want to be deliberating over two weeks for a traditional contract signing process and contract negotiation process.
“The online auction platform is uniquely well-situated to sellers [and buyers], in that it enables both to bypass a two-week offer negotiation process,” he said.
It may seem ironic, but according to Webster, the auction process – at least in the CRE world – provides a higher degree of certainty for both parties going into the transaction. Sellers get a nonnegotiable contract and a hard money deposit at the time of the winning bid. And because buyers are confined to these conditions, they know they’ll walk away with the keys to the property in as little as 30 days as long as they place the successful bid, which is crucial in managing a volatile market that is “moving right now on a day-by-day and even hour-by-hour basis.”
With these due diligence and other preliminary steps completed upfront and the closing process expedited, investors can capitalize on opportunities on a rapid timeline, Webster added.
Transparency is especially important for buyers as well, he continued, because investors in the hospitality market often aren’t represented by brokers, even in traditional sales. Hotel investors are typically a highly entrepreneurial bunch who, in order to thrive, often possess a keen barometer for risk. Webster also noted that since they’re often forced to think outside the box to find opportunities, they’re more inclined to adapt to technology such as online auction platforms to determine market value and competition. In an auction, the process is “kind of doing that for you,” he said. “It’s tough to add incremental value as a buyer rep in those scenarios.”
Furthermore, the auction process democratizes the market for both buyers and sellers. An auction, Webster noted, “requires the seller to produce all third-party documents, a property improvement plan, full disclosure on financials and everything else.” Buyers, he pointed out, “can rest assured that they are stepping into a situation that is fully transparent in which they know they have all applicable documents and reports to make a decision about pricing and whether or not they want to bid.”
Sellers, by the same token, “know that only capable bidders are being approved to register and bid,” he explained. “It removes the potential for folks that do not have the wherewithal to come and bid a price up above and beyond what they are capable of closing on today.”
Ascertaining Market Demand and Pricing
To accurately set prices based on real demand, hospitality assets of all sizes use online auction platforms to gauge interest for opportunistic sales.
Take, for example, the Hilton Meadowlands in East Rutherford, New Jersey, near the NFL’s MetLife Stadium and the massive American Dream mall. With JLL as the broker, the owners are working through what is known as a “managed bid” process on Ten-X this month. As reported by CoStar News, JLL is gathering “indicative bids” that will allow them to set an accurate reserve price should the seller choose to move forward with an auction on Nov. 18. In a similar vein, the independent Gallivant Times Square hotel is also going on the auction block as a “test” to gauge buyer interest, with a starting bid set at $5 million.
“Anything could hypothetically be a sale at auction,” Webster said. “Anything.” But what makes a successful transaction and what his firm focuses on when determining whether a deal is the right candidate for an auction, is whether a seller is “expressing a certitude of willingness to transact and that they are going to do the things that encourage buyer confidence and encourage buyer bidding.”
This is done through a “realistic setting of reserve price,” he said, and a “willingness to spend a few dollars on the front end to provide the reports and ensure the financials are properly representative … giving potential buyers everything they need to confidently bid.”
The insight into buyer interest is incredibly valuable, Webster noted, as it ensures that most crucial aspect of an auction sale for both parties is accounted for. “Above and beyond everything else, it’s about having a proper understanding of where the market is at pricing-wise and making sure the reserve price is representative of that,” he said.
Moreover, buyers feel strongly that their purchase price is aligned with the asset’s true market value because they witness the bids and interest from other prospective purchasers in real time.
Finding the Best Opportunities
As to what types of properties are most promising, Webster conceded that it’s tough to say.
“With the core-branded properties – what we call ‘franchising the flag’ from brands such as Marriot, Hilton, Hyatt, IHG, Wyndham Choice, etc. – there tends to be a slightly higher degree of experience level on the investors’ side,” he noted. “But there are plenty of first-time hoteliers that step up and bid on assets, and it’s really case by case, market by market and asset by asset.”
In some situations, the franchise element is a necessary draw, he noted. But in a market like Washington, D.C., and its Georgetown neighborhood submarket, for example, “the destination is more driving of demand than the brand is, and so there are going to be situations where buyers may elect to pursue it independently.”
Buyers certainly must be cautious when reading the incredibly complex market, he noted. On one hand, weekly hotel occupancy slumped even further to 44% in the first week of November, down 39% from the previous week, according to STR data. Revenue per available room was down nearly 56% to U.S. $40.36. But on the other hand, hotel construction in the United States is likely to continue declining over the next several years, according to Jan Freitag, the national director for CoStar’s hospitality analytics. Lower supply could help correct demand imbalances for existing capacity. Likewise, CEOs of some of the most prominent and wide-ranging hotel offerings on the market remain generally optimistic about a significant rebound in demand next year, according to Hotel News Now.
But to cut through the uncertainty, Webster concluded, it’s important to “differentiate the forest from the trees,” which he says his firm does through maintaining a long-term view of all assets set for disposition, regardless of whether they have 20-year leases in place or are roiled by a daily occupancy cycle.
“Yes, there’s a tremendous amount of inherent noise in the market now throughout the days and weeks and months, but our underwriting and pricing is reflective of a five-year holding period, which we hope helps straighten those lines out.”