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CORONAVIRUS – COVID 19

As a result of the Coronavirus-Covid 19 the U.S. Hotel Industry in 2020 has suffered the greatest decline in hotel metrics ever recorded.  Cash flows have plummeted and we are facing a prolonged and painful recovery with both leisure and business travel unlikely to come back until the virus is under control.  There have been some signs of improvement with occupancies increasing to 39.3 percent recently from an anemic 15.0 to 20.0 percent.  Luxury hotels have been hit the hardest recording an occupancy level of 33.4 percent.  While economy hotels have the highest occupancy at 46.4 percent.  In fact, the extended stay exterior corridor properties are currently experiencing the highest occupancy levels.  The first to recover has been the drive-to leisure hotels.  There has been some increase in demand from the leisure traveler.  Corporate business travel has remained stymied and convention travel is non-existent.

To further complicate matters ADR has dropped by 44% compared to last year as hoteliers try to buy business from other hotels.  This is a very dangerous business model.  There is only so much demand in a market, and by dropping your rate you are not going to create demand by stealing business from your competitor.  All that happens is you drop your rate, and your neighboring hotels drop their rates in response and the vicious cycle begins.  We cannot change the demand in the local market but we can control the rate.  It is very important during these times that we do not get into a rate ware.  The only person that wins is the consumer.

With the decrease in occupancy and drop in ADR RevPar has declined by nearly 60 percent.  Demand is forecasted to return to pre-crisis levels in the third quarter of 2022, while ADR is not expected to return to pre-crisis levels until the third quarter of 2023.  This has and will create cash flow problems.  Many hotel owners have been able to help their cash flow problems by obtaining a paycheck protection program loan of which the SBA has relaxed their rules.

Changes to PPP Loans (Payroll Protection Plan)

Maturity Date is now 5 years instead of 2 years

More time to use the loan proceeds 24 weeks instead of 8 weeks

Decreasing the amount of funds required to be used for payroll from 75 percent to 60 percent allowing more money to cover other business expenses

The SBA has also reopened the EIDEL Program to all businesses including hotels, not just Agriculture related businesses.  Many hotel owners have been able to negotiate some type of forbearance with their lenders delaying three to six months of mortgage payments and adding those payments on to the end of the loan.

We have lots of Buyers with cash who are looking to take advantage of this dip in the market.  Unless you are desperate to sell our advice is not to sell at this time.  Prices have fallen by about 30 percent as a result of this pandemic.  Financing is extremely difficult as Lenders don’t know when and where the market will settle.  Appraisers have the same problem.  “Cash is King” and those that have it know it and they are looking for bargains.  If you are having trouble making your mortgage payments you need to be proactive with your lender.  You need to approach them, share your concerns, be honest and propose a plan.  Remember Lenders really don’t want to foreclose on your hotel they don’t know how to run a hotel.  Nobody knows more about your hotel or cares more about your hotel than you.  If you are having problems we are here to help as we have helped many borrowers in the past reach a workable solution with their lender.  As revenues increase so do values.  We are at the trough right now.  All indications are that the 3rd and 4th quarters of 2020 will begin a turnaround and things will continue to improve as we move forward.  If you do need to sell now, we are here to help you in various ways.  We can conduct a private auction, a national public auction or a traditional method of selling.

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Commercial Real Estate Industry

                Spring (March-May) is the peak season for hotels in our market.  These months generate a significant portion of the full years revenue and profit, averaging about 5% more revenue during the Spring travel season with higher occupancy rates and even more important higher ADR’s which flow directly to the bottom line.  Unfortunately this has all been lost for 2020 and will not return until 2021.  Currently occupancy is averaging about 20% in our market.  It has increased from around 10% earlier.  Many hotels have closed, most temporarily.  Across the U.S. it is estimated that 50% of all hotels will close at some point.  Most will be temporary and will reopen as the economy improves.  The brunt of the damage is expected to occur in the 2nd quarter, with the third quarter improving and the fourth quarter more normal.  Unfortunately the fourth quarter is the weakest quarter of the year.  Average occupancy for 2020 is expected to be 37.9% a 42.6% decline from 2019.  Occupancy for 2021 is expected to be 59.7% an increase of 57.3% over 2020.

                Domestic leisure travel, fueled by cheap gas and relaxation of lockdown orders will be the first to bounce back followed by corporate transient and corporate group demand only after a feeling of safety takes hold.  The first hotels to recover will be the drive to hotels in smaller markets, then urban, followed by airport hotels and the last to recover will be the convention hotels.  The economy extended stay hotels with exterior corridors are doing better than other hotels, as contractors can park their pickup trucks at their door and leisure travelers have direct access to their rooms without having to walk through a lobby or down a hallway, avoiding contact with other guests and staff.  It is estimated it will take 3 years for hotels to regain their full value.

                Retail was struggling before the pandemic.  The pandemic just put an exclamation point on retail.  It is estimated that 70 to 90% of retailers including restaurants, beauty salons, barbershops etc. missed their April rent or mortgage payments.  The same is expected for May.  Office users fared better with 90% of them making their rent/mortgage payment in April.  But this sector has a lot of exposure going forward as people and businesses adjust to employees working at home.  Multifamily remains one of the darlings as 89% of renters made their April rent payment but May is a big question mark.  Hopefully people will use their stimulus money and unemployment money to pay May rent.  Apartment renters are the segment most impacted by this pandemic as they tend to be the waitresses, bartenders and hair dressers who are forced to live paycheck to paycheck and they are the first to be let go by their employers.  Industrial was another darling as most tenants made their April rent payment and are expected to going forward.  Self Storage continues to be the most recession resistant sector.  In the Great Recession this sector actually improved as people downsized from their big homes to smaller houses and needed to store their furnishings.  This industry has become very automated with rent automatically charged every month to a credit card.  The customer forgets about the storage until the next automatic credit card payment is charged, and this goes on forever.  Student Housing once one of the most sought after investments could be in for a rough time as on line learning becomes more popular and people were already questioning the high cost of a college degree.  Some colleges will actually be forced to close.  Those that stay open will require their students to stay in the College owned dormitories if they are not participating in the on line learning.

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Hospitality Industry Update

Last year marked the 11th year of this economic cycle, the longest stretch of economic growth that we have ever seen in U.S. history.  The good news for the economy in 2020 is that a recession is unlikely barring some shock like war, a terrorist attack or a natural disaster.  The bad news is GDP will moderate continuing last year’s trend of gradual slowing.  Expect growth of 1.9%, down from 2.3% in 2019 and 2018’s brisk 2.9% pace.  The second half of 2020 will be better than the first.  Interest rates are still historically low and indications are the Federal Reserve will not be making any changes by either cutting the interest rate or hiking the rate.  Inflation remains in check running at about a 2.2% level.  There’s ample capital looking for investments.  The economy remains in a great place giving no reason to fret about the end of the good times. 

Many experts are predicting that 2020 will be very similar to 2019 and that growth will be minor or flat.  While occupancy levels are forecasted to decline in 2020 and 2021 the health of the U.S. lodging industry remains strong.  Tighter lending requirements and escalating construction costs will curtail the amount of new construction estimated to be 2.2% by Lodging Econometrics.  The economy continues to support demand for lodging.  With the continued demand and less new supply occupancy levels should remain above 65% for the foreseeable future.  The growth in room rates will be very limited for the next couple of years.  With limited room rate growth ADR growth and Rev Par growth will be very negligible making it very difficult to grow profits.  Adding to this dilemma are the rising operating costs highlighted by rising labor costs, insurance costs and property taxes.  The bottom line is expected to be flat or a slight decline for the next couple of years.

Investment remains strong in hospitality.  There is no shortage of capital going into lodging on both the debt and equity sides.  Acquisition financing is fairly easy to get, construction financing is more difficult, dependent upon the strength and experience of the borrower.  We have seen a lot of non-traditional money coming to hospitality from the apartment sector, office sector and high net-worth individuals looking for a better return. 

The cost to build a new hotel has increased dramatically it is cheaper to buy an existing hotel than it is to build.  Existing hotels will generate cash flow much quicker as it generally takes about two years of planning, a year and a half to build and then two years to ramp up.  If you purchase an existing hotel it should cash flow on the day you close. 

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Multi-Family Industry Update

Last year marked the 11th year of this economic cycle, the longest stretch of economic growth that we have ever seen in U.S. history.  The good news for the economy in 2020 is that a recession is unlikely barring some shock like war, a terrorist attack or a natural disaster.  The bad news is GDP will moderate continuing last year’s trend of gradual slowing.  Expect growth of 1.9%, down from 2.3% in 2019 and 2018’s brisk 2.9% pace.  The second half of 2020 will be better than the first.  Interest rates are still historically low and indications are the Federal Reserve will not be making any changes by either cutting the interest rate or hiking the rate.  Inflation remains in check running at about a 2.2% level.  There’s ample capital looking for investments.  The economy remains in a great place giving no reason to fret about the end of the good times.

Sustained demand for rentals amid a slowdown of deliveries in our market in 2019 led to rising occupancy rates.  As the price of home ownership continues to rise renting remains a popular option for many people.  Even for those individuals who can own, renting an amenity-rich apartment near work and lifestyle centers presents a very favorable choice.

Apartments remain the darling of all real estate sectors.  There is more capital chasing apartments than any other sector, and is the preferred real estate by lenders followed by industrial. 

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Self-Storage Industry Update

                                                                                                                                                              

Last year marked the 11th year of this economic cycle, the longest stretch of economic growth that we have ever seen in U.S. history.  The good news for the economy in 2020 is that a recession is unlikely barring some shock like war, a terrorist attack or a natural disaster.  The bad news is GDP will moderate continuing last year’s trend of gradual slowing.  Expect growth of 1.9%, down from 2.3% in 2019 and 2018’s brisk 2.9% pace.  The second half of 2020 will be better than the first.  Interest rates are still historically low and indications are the Federal Reserve will not be making any changes by either cutting the interest rate or hiking the rate.  Inflation remains in check running at about a 2.2% level.  There’s ample capital looking for investments.  The economy remains in a great place giving no reason to fret about the end of the good times.

The self-storage sector has undergone substantial changes over the past several years.  This includes a condensed period of elevated construction, new technology allowing 24 hour access, less direct interaction with the customer through the internet including leasing units and making rent payments.

Today most self-storage facilities sell for cap rates of 5.5 percent to 8 percent depending upon the age, physical condition and market competition with the average being a 6 percent return.  Lifestyle changes and shifting demographics are expected to bolster demand, supporting a positive outlook for owners and investors and sustaining the flow of capital into the sector.

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Hospitality Industry Update

The Hospitality Industry is at a neutral point. Occupancy rates for 2019 and 2020 are expected to be stagnant to a slight decline. ADR is expected to have a slight increase over the next two years as a result of rising inflation rates. Supply is expected to remain steady averaging slightly over the long term average of 1.8%. Demand will have a slight increase but that is offset by a larger supply increase resulting in the slight decline in occupancy rates.

2019 CBRE
Supply: 2.0%
Demand: 1.8%
Occupancy: – 0.2%
ADR: 1.1%
RevPar: .9%

2019 Smith Travel
Supply: 1.9%
Demand: 1.9%
Occupancy: 0.0%
ADR: 2.3%
RevPar: 2.3%

2020 CBRE
Supply: 2.1%
Demand: 1.3%
Occupancy: – 0.8%
ADR: 2.0%
RevPar: 1.2%

2020 Smith Travel
Supply: 1.9%
Demand: 1.7%
Occupancy: – 0.2%
ADR: 2.2%
RevPar: 1.9%

Interest rates are expected to continue to decline which will help stabilize values as net operating incomes may very well decline. Operating expenses have increased an average of 4% per year over the last several years. Given the top line projections operating expenses will need to be curtailed to a 2% increase in order to obtain the same net operating income. This is going to be very difficult to do in light of the tight labor market, rising insurance costs, taxes, utilities, etc.


The good news is this is just a blip on the radar screen and not a recession. Things are going to slow down but good operators and good properties will be just fine.

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Self Storage Market

Nationally the rise in new supply has both depressed overall rental rates and increased concessions. Stagnant rents are finally dampening the enthusiasm of developers to build new properties. That should help cool down the competition for tenants, and eventually allow rents to grow again. But because the trade area of a self-storage property is so small, properties in different sub-markets of the same metro area may perform very differently from each other. There are submarkets where properties are getting 6 percent to 8 percent rent growth per year, and there are sub-markets with 2 percent to 3 percent declines. It all depends upon your individual market.

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Hospitality Industry Update

We have enjoyed 10 consecutive years of occupancy expansion, but now we are about to enter a period of a slight slowdown.  Demand growth for 2019 is estimated to be 2.0% and for 2020 between 1.1% (CBRE) and 1.7% (Smith Travel).  This is a direct result of the National Economy slowing down.  Demand growth closely follows the National Economy.  Changes in lodging demand growth typically lags the National Economy by one year.  The National Economy is expected to grow by 2.2% in 2019, .7% in 2020 and 1.4% in 2021.  Supply growth is anticipated to continue at the long term average of approximately 1.8% per year.  Occupancy levels will remain relatively flat to a slight decline.  The good news is the anticipated downturn will be slight and short lived.  The recovery should begin in 2022 with a 1.3% increase in RevPar, followed by a whopping increase of 3.8% in 2023.  The rising cost of new construction will limit the growth of new supply.

Smith Travel – 2019                                                                               

Supply:  1.9%                                                            

Demand:  2.0%                                                         

Occupancy:  0.1%                                                    

ADR:  1.9%                                                                 

RevPar:  2.0%                                                                                                                            

Smith Travel – 2020

Supply:  1.9%    

Demand:  1.7% 

Occupancy:  (0.2%)                                                 

ADR:  2.2%         

RevPar:  1.9%    

CBRE – 2019

Supply:  2.0%    

Demand:  2.0% 

Occupancy:  0.0%                                                    

ADR:  1.9%         

RevPar:  2.0%    

CBRE – 2020

Supply:  1.9%    

Demand:  1.1%

Occupancy:  (0.1%)

ADR:  .03%

RevPar:  1.8%

Hoteliers will need to concentrate on revenue management, property maintenance, labor costs, insurance and other expenses to continue to earn strong returns and preserve value while riding out the slowdown.  The limited demand growth cannot keep pace with the modest supply increase.  With the slowdown in the economy rising interest rates aren’t the worry the way they were at the start of the year.  The Fed is likely to dial back rates to help boost the economy.  The Federal Reserve has policy meetings on July 31st and September 18th.  It is anticipated that at one of these meetings the Fed will lower interest rates by a quarter of a point, with two rate cuts likely in 2020.  Financing remains abundant for acquisitions.  Even rehab money and new construction money are available although there is stricter underwriting requirements, a lower loan to value, and slightly higher interest rates for these types of loans.  Values will remain stable as cap rates have stabilized as a result of interest rates stabilizing.  The market has been good for so long that it is much harder to find deals that make sense.  We still have more Buyers than Sellers as it remains a Seller’s market.

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Hospitality Industry

The Hospitality Industry has been enjoying terrific demand growth from all its key drives:  business travel, trade show and conference attendance and tourism for the last ten years.  The market now is comprised of almost 56,000 hotels and approximately 5.28 million rooms and is still firing on all cylinders, reaching all-time highs for 12 month averages in occupancy (66.2%), ADR ($128.27) and Rev Par ($84.98).  According to Smith Travel Research, hotels across the U.S. have reported Rev Par increases over the past 100 consecutive months.  While hotel operators are feeling pressure from increased insurance costs, labor costs and other expenses, hotel metrics are forecast to climb in 2019 led by increases in occupancy (+ 0.4%) to 66.2%; ADR (+ 2.6%) to $129.00 and Rev Par (+ 3.0%) to $86.00.

Lodging Econometrics reported strong increases in supply, with the addition of 1,086 hotels and 125,614 rooms in 2018, a 10% increase over 2017.  New rooms are always a concern but because new demand, in general will continue to exceed new supply through 2019 this should not be a concern, although there are some markets that are overbuilt.  While growth should continue across all segments, the highest growth for 2019 is expected in the independent segments (+ 2.5%) followed by midscale, upper midscale and upscale.

Transactions in 2018 were up as compared to 2017 with cap rates remaining steady.  The only limiting factor to more hotel transactions is the lack of hotels for sale.  Both equity and debt are available for good, solid transactions.  Nationally, full service hotels are selling at a cap rate of 8.1%, while limited-service hotels are selling at a cap rate of 8.8%.  The outlook is stable, with an at-most increase of up to 25 Basis Points.

Terry Baltes 

 

                                                                                                 

                                                                                              

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Multifamily Industry Update

The U.S. economy will keep growing.  But the pace is clearly starting to slacken as the boost from last year’s tax cuts starts to fade and the slowing global economy weighs on the U.S.   Figure on GDP growth of 2.5% or so, a noticeable step down from 2018’s 2.9% rate.  And the economy could flag by year-end.  Don’t be surprised if growth in the fourth quarter slips below 2%.  With so few workers to hire, firms will be hard-pressed to increase their output much unless they can figure out how to get more efficient with their existing workforces, a challenge lately.  Look for the jobless rate to fall to a slender 3.4%.  We expect the Federal Reserve to raise rates twice over the course of 2019, taking the bank prime rate to 6% by December.  Long term rates are a different story, though.  They may rise in the middle of the year before pulling back by the end of 2019 to near 3%, not much higher than now.  Investors who are worried about an economic slowdown or recession in 2020 or 2021 will buy up Treasuries as a safe haven, which will keep yields fairly low.  Rate hikes and slowing growth will keep inflation muted at 2.3% in 2019.

In an increasing interest rate environment with flat cap rates multifamily investors are looking more at secondary and tertiary markets such as ours in order to achieve their desired returns.  We are also seeing many real estate investors from other asset classes looking to purchase multifamily assets because of its recession resistant nature.  Many investors look at multifamily investing as similar to purchasing long term bonds.  Their belief is that as long as you have professional management and competent maintenance your investment is very safe.  The lack of easily available construction capital, or at least tighter standards for new construction is likely to be a self-correcting phenomenon for restricting new supply.  This coupled with the high increase in construction costs has caused many investors to switch from development mode to acquisition mode which bears well for existing multifamily assets.

There has been an increased demand for class B and C apartments by investors as the retention rates for the new shiny apartment communities tends to be low.  With less than half of the residents opting to stay when their leases expire.  Such turnover results in high expenditures for marketing and unit make-ready in order to attract new residents.  In short, net operating income is low if vacancies are high. 

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