Challenges remain for investors, but outlook robust

Hospitality investors are facing a slate of “persistent challenges”, but long-term optimism remains, according to a panel of experts speaking at the NYU International Hospitality Industry Investment Conference in New York on Monday.

Chief among the headwinds slowing progress are inflation and the cost of finance, according to Tim Abram, managing director, Starwood Capital Group. Said Abram: “Consistent cost inflation remains one of the biggest challenges we see from an operational perspective.

“In the capital markets, there are some adjustments in pricing, but not a lot. The cost of financing is also one of the biggest challenges, particularly for repositionings, the types of deals we go after.”

He added: “Some CMBS markets are really liquid right now, but debt financing is still an issue. However, we still have a lot of equity to deploy; despite rates going up, the cost of equity hasn’t risen too much.”

Sourav Ghosh, EVP, CFO, Host Hotels & Resorts countered that his firm was less troubled by these factors. “We have minimal debt and are flushed with cash,” he said. “We want to be net buyers and are cash buyers.” With a goal to expand Host’s EBITDA, Ghosh said that the firm’s underwriting was very detailed, and that Host had been “acquiring assets with little to no capex requirements in the short term”. Another positive was the firm’s access to deals – “eight of the eleven transactions done since 2021 have been off market”, he underlined, adding that the firm’s investment horizons were also helping unlock value. “We are long-term holders of real estate – so it is really about long-term value creation.”

Michael Mohapp, partner at KSL Capital Partners, suggested that despite the persistent headwinds, some market aspects were definitely showing signs of improvement. He said: “We are really seeing transaction activity start to pick up a little bit. A year ago, there were a lot of questions around the urban real estate market. Twelve months on, there is more clarity. All that is helping narrow the bid-ask gap a little bit.”

He added: “As a firm we have always been highly focused on leisure travel and the resort space. We see people going back to traditional travel patterns and anticipate a lot of opportunity in these markets going forward.” Mohapp noted that the firm was ready to invest capex to upgrade resorts in the right locations. “There are a number of markets across the US that are forever markets for us,” he added.

Abram agreed that resorts looked like an interesting investment area. He noted: “There is still some ‘bumpiness’ in some of the resort markets we are focused on, but we are buying with a five-year repositioning plan in mind.” He added: “I think there is going to be a really good run of lack of supply in some of these markets. We don’t generally buy large convention hotels or business-driven structures.”

Mit Shah, CEO, Noble Investment Group, said that time had given a lot of hotel investors a better view of the investment landscape, although a number of predictions from the turn of the year hadn’t come true. “Quarter over quarter, we thought we would see more leisure demand, and there was talk of three or four rate cuts,” he said. “The data is now clearer and the reality is that there will be far fewer rate cuts this year. However, the market is normalising and that will help those who need to sell to start planning ahead.”

Shah concluded: “We are all wildly optimistic in terms of secular trends that are going on. I think that the second half of the year is going to be a lot more significant in terms of the transactions market.”