The expectations of would-be investors were that distressed hotel deals would rapidly occur in 2021, similar to the results in 2020, however, this did not come close to what was expected.
At some point, lenders won’t continue to play nice. Loans will eventually come due, and the equity is going to run out on troubled hotels and will have a negative carry. Owners can only modify their loans so many times and kick the can so far down the road, he said. At some point, time will run out. In many cases where owners don’t have access to liquidity, which was the situation for many private owners, they already used up their furniture, fixtures, and equipment reserves to keep the lights on and pay for the cash burn. Not only have they used that all up, but they also didn’t invest in their hotels before and now they have no capital to invest in their hotels during the recovery.
That puts these hotel properties at an extremely competitive disadvantage against hotels that have recently been updated or are undergoing renovation now. That’s also where you may find some opportunities because those assets start losing market share because they haven’t kept their properties in good order. You continue to lose more market share because your competition is reinvested. You have to do more discounting and performance goes down and then it just continues to repeat.
The hotel industry recovery is going to come around, but the question remains whether group, meeting and convention businesses will return to pre-pandemic levels. That may result in money chasing distressed opportunities for big-box hotels and taking them down at compelling prices. Investors could break those 1,500-room hotels into three different brands or carve out some rooms for residences.
The 24/7 markets used to be the darling markets of the industry with high barriers to entry and being where people wanted to go and that’s not the case right now.
All in all, there is always a deal to be made and this is where the smart investors will be looking while everyone else is chasing select-service hotels. While select-service is a great segment choice, there is no shortage of the big-box assets that will open up opportunities to figure out what to do with real estate.