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March 25, 2020  

Hotel Trading Seizes; Some Deals Collapse

The market for large hotel sales has frozen in the past week, as buyers and lenders pulled back from the property sector hit hardest by the coronavirus crisis.

What looked a few weeks ago like a potential stall turned into a full stop. Most large listings were shelved. Some buyers walked away from deals, while others were scrambling to renegotiate prices — and to line up financing, even as lenders largely have shunned the sector.

“It has gotten so much worse, so much faster than anyone thought,” one broker said. “You can’t do anything — for now.”

Owners and operators last week started shuttering properties and laying off or furloughing workers, as bookings plummeted due to cancellations of travel and gatherings. Companies such as Marriott International and REITs like Park Hotels & Resorts and Pebblebrook Hotel decided temporary closures would be less costly than staffing and operating properties at low occupancy rates.

The upshot: the investment-sales market is virtually closed. “Most of the high-profile assets have been pulled,” said one West Coast broker. “If you are still in the market and going to bid a deal, you are tone-deaf.”

Another, on the East Coast, agreed. “We are not pursuing bids on anything,” he said. “We told people that we are going to hit the pause button. Overall, the market is probably 95% [turned] off.”

Meanwhile, investors with pending purchases are increasingly looking to renegotiate or exit their agreements. “In general, deals are blowing up and [investors] are walking away from deposits,” a broker said.

For example, Xenia Hotels & Resorts’ deal to sell the 492-room Renaissance hotel in Austin to Walton Street Capital is on the rocks (see article on Page 2).

A few trades could still limp across the finish line, specifically those where a buyer has put down a sizable deposit. But even in those cases, brokers said some buyers are negotiating to change pricing and other terms — for example, asking the seller to provide financing, or to guarantee income for a period of time.

In the early days of the crisis, hotel pros believed the strength of the lending market and low interest rates would provide a silver lining — helping buyers proceed with purchases and allowing owners to opt for refinancing. But in the last week, lenders have either shifted their terms dramatically — reducing leverage, increasing recourse requirements — or have stopped looking at hotel-loan requests altogether.

As of last week, Mirae Asset Global Investments was still trying to line up financing for its $5.8 billion purchase of 17 luxury hotels across the U.S. from China’s Anbang Insurance. The South Korean asset manager has put down a nonrefundable deposit of some $580 million. It was reported to be planning to put up more equity and use short-term financing to close in the coming weeks.

The greatest obstacle facing the sector at the moment is the high level of uncertainty about how long the pandemic might last and how deep its impact on hotel revenues will be. For the week ended March 14, occupancy rates nationwide were down to 53%, according to STR. Room rates averaged $120.30, down 10.7% from the same period last year. As a result, revenue per room plummeted 32.5% to an average of $63.74. Those figures, from before corporate and government bans on travel and gatherings tightened last week, don’t capture the full extent of the collapse hotels are experiencing.

Analysts are looking at previous disruptions such as the periods following the 9/11 terrorist attacks in 2001 and the 2008 recession for guidance.

“This is going to blow past that,” said Lukas Hartwich, a senior analyst and lodging sector head at Green Street Advisors, which owns Real Estate Alert. “This is going to be a severe shock, and it is just a question of how quickly we recover from it.” Green Street projects revenue declines of 18% and a drop of more than 40% in net operating income for 2020.