Certares likes that It’s hard to sell hotels

Editor’s note: This is the second part of a two-part interview with Nolan Hecht, senior managing director and head of real estate for Certares. Part one focused on Certares’ sale of the East Miami hotel and its acquisition of the majority stake of the Hyatt Regency Greenwich from Trinity Investments.

NEW YORK CITY — Nolan Hecht knows a lot about buying and selling hotels. He said it’s especially hard to sell right now, but he also thinks that situation can create buying opportunities for companies like his.

“In my career, some of the best buying opportunities have been while others have been on the sidelines,” said Hecht, senior managing director and head of real estate for New York City-based Certares.

Last week, Certares had a notable sale with the East Miami hotel (which it owned with Trinity Investments) to Blackstone Real Estate. The company also recently made a notable acquisition by again partnering with Trinity to acquire a majority stake in the Hyatt Regency Greenwich in Connecticut from Trinity.

Hecht admits it would be easier with more buyers in the market, but he said Certares will keep being opportunistic until then.

“You will probably need one or two interest rate cuts — and I think they’re coming — until you get more folks off the sidelines. That’s what it’s going to take,” he said. “But while folks have been off the sidelines, we’ve been opportunistically buying.”

Nolan Hecht's Certares recently sold the East Miami in Florida and acquired the Hyatt Regency Greenwich in Connecticut.

Hecht said hotel investment is in a period where the REITs haven’t really been buying assets and foreign capital isn’t coming to the U.S. So, that really leaves private equity and high-net-worth individuals or offices as the main players. Plus, the bid-ask spread is still a problem.

“There’s been a bit of a disconnect in terms of what sellers are willing to sell for and what buyers are willing to buy for,” he said. “It probably was a 100 basis points spread in the cap rate last year. It’s come down to more like 50 basis points. So, we’re getting closer to a period that has more liquidity.”

Hecht said in certain markets (like Florida), there are buyers, but in general, many are taking a “wait-and-see” approach. But not Certares.

“We are much more bullish,” he said. “We have a longer-term focus on the hotel business, not what’s going on necessarily in a market today or tomorrow. We love the supply/demand fundamentals right now in the U.S. and we play more on in the upper scale [of hotels].”

Why Certares is bullish

Hecht said Certares’ bullish nature comes from the fundamentals it is seeing with leisure and group numbers. But it’s also coming from the lack of new supply in markets where it wants to acquire.

“We’re seeing a pretty resilient upscale customer… We’re seeing strength on the demand side, certainly leisure strength and certainly group strength,” he said. “This is the best supply picture, or lack of supply, that I’ve seen in my 28 years in the business. We focus on the urban cores and the central business districts and coastal assets and resorts and there is nothing getting built. When you parse it down, it’s less than 0.5% in supply in these urban markets, and historically that’s been 2-2.5%.”

We’re seeing a pretty resilient upscale customer… We’re seeing strength on the demand side, certainly leisure strength and certainly group strength.

Nolan Hecht

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That kind of conviction had fueled several of Certares’ acquisitions in the past few years in Boston, San Diego and Delray Beach, Florida, Hecht said.

“We bought the Hilton Boston Back Bay, and there is not a single full-service hotel under construction of any size in Boston right now,” he said. “Also, there’s zero [new supply] in San Diego… In Delray Beach, you probably won’t see a new hotel for a decade.”

Hecht said he thinks the buying market is going to pick up in the second half of the year, especially with the Fed expected to make a rate cut on Wednesday and later in the year.

“The catalyst is going to be these rate cuts and I think it’s more symbolic than anything,” he said. “But it will also give buyers and sellers, especially buyers and they’ll have essentially positive leverage on day one… That will start getting a lot more transaction activity. I expect it to pick up, certainly in the first quarter of next year or towards the last quarter of this year.”

Certares has acquired 16 hotels since 2021, but the company has looked at a lot more, Hecht said.

“In my career, supply is always the killer for the hotel industry, and we’re terrible about it. Anytime things get good, we start overbuilding,” he said. “The barrier to building right now is really strong. Right now, the cost to rebuild a hotel is 30-50% from where it was pre-pandemic and the banks have zero appetite for hotel construction lending. They’ll give you a loan for an acquisition. They’ll give you a loan for neutral financing, but there is no demand for construction financing. When you put that together, you really have a muted pipeline.”

State of leisure

Leisure travel is here to stay, Hecht said, as people are prioritizing travel and experiences over things like home improvement.

“COVID may have been the catalyst to that… and we’re really not seeing a slowdown,” he said, noting that any leisure slowdown is coming from Canadians not coming to the U.S., but even that will eventually lessen, he said.

“We’re bullish on leisure. We’ll certainly be bullish on the group. We’re seeing increased attendance at all the major convention centers,” he said. “In general, we’re seeing pretty positive trends.”

Certares and Hecht love to find “pocket” neighborhoods in markets that have multiple demand drivers because they can perform best even in a soft market. He mentioned recent deals in Boston and New Orleans as being representative of that opportunistic spirit.

The catalyst is going to be these rate cuts and I think it’s more symbolic than anything. But it will also give buyers and sellers, especially buyers and they’ll have essentially positive leverage on day one… That will start getting a lot more transaction activity.

Nolan Hecht

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“We’re seeing really opportunistic opportunities to buy things. Some of them are assets that are overleveraged. We’re taking advantage of owners that need to sell because their debt is either too high or too expensive,” he said. “Both Boston and New Orleans are examples of assets in great locations with great flags that needed to be renovated.”

As for the new “pockets” Hecht said Certares is interested in, he started with Florida and then continued to head north.

“We’d certainly like to do more on the west coast of Florida. We’ve bought two on the east coast [of Florida]. We own one in Tampa. The west coast still has room to grow even more,” he said. “We are bullish on the Southeast… Savannah, Charleston, up the coast and then these urban cores where nothing is getting built.”

Hecht said Certares would also love to do more in the Northeast and also likes the dynamics at play in Arizona, especially the Phoenix area (although the pricing hasn’t worked out yet). He also mentioned Columbus, Ohio, (he likes university towns showing growth) and Salt Lake City (but he noted there isn’t much to buy) as other potential targets.

“Our first few years at Certares, we were more pure leisure and warm-weather focused. Now we are looking in the urban cores a little bit more than we have in the past,” he said, noting Washington D.C. could be another market where there may be opportunistic potential. “Eventually, government demand will come back a little bit stronger. They’ll have to go back to work. So, you may be able to buy something attractive there.”