Where investment opportunities will be 2H24

DALLAS — When asked what types of hotel transactions are currently happening in 2024, Austin Brooks said where the debt is most efficient. “We’re seeing this barbell dynamic where we’re churning out, on the larger side, let’s call it over $100 million, more trophy [types of hotels] that have seen a huge pickup in the second quarter,” said the managing director for the Dallas office of Hodges Ward Elliott. “On the other side of the spectrum — let’s call it under $50 million — and certainly under $20 million, we’re seeing that there’s just been a huge [amount of deals] that have dominated the trades over the last couple of years. The buyers in that space are generally either closing all cash, or with a small equity checks, or accessing local relationships with banks where they’re generally signing personal guarantees to get the best rates.”

Brooks participated in an “Investment and Development Insights” panel at the ALIS Summer Update on July 25 at the Kimpton Pittman Hotel in Dallas. Other panelists included Mehul Patel, CEO and managing partner of Dallas-based NewcrestImage; Pinal Patel, secretary of AAHOA; and John Schellhase, assistant vice president of development and investments for Atlanta-based Peachtree Group.

When assessing the current market, Mehul Patel said there is still a lot of private capital available in the market. His NewcrestImage has bought and sold almost 300 hotels in the last 10 years, has several investments in hospitality companies and even owns a bank, Dallas-based American Bank.

What’s happened in the last 12 months is that capital is available, but people thought instead of investing in equity, they should do debt, and that didn’t pan out because fewer transactions happened.

Mehul Patel

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“What’s happened in the last 12 months is that capital is available, but people thought instead of investing in equity, they should do debt, and that didn’t pan out because fewer transactions happened,” he said.

Patel said investors didn’t want expensive debt and wanted to raise equity. But a lot of capital remained on the sidelines. Now, he senses a shift happening. “What you’ll see in the next four months is that capital will be very aggressive,” he said. “If two or three rate cuts happen, the people who think they want to deploy that capital will convert to equity, and that gap is where [investors] will come in.”

Pinal Patel has extensive experience converting and repositioning hotels, especially from independent to brand. He said one thing is usually most important in that type of development. “Location is number one. We’ve done a few projects where we’re going from a brand to an independent, and the infrastructure is already there for the plumbing and electrical. It’s costing us much less to reposition that asset,” he said. “What we’re also doing in some markets is going from an independent to a branded hotel, and that’s specifically because of location as well… We’re noticing that in some of these markets, it doesn’t matter whether it’s a brand or not. [It’s more about] the property itself, when it’s positioned the right way, and where it’s located.”

When asked about which markets are emerging right now around the U.S., Schellhase mentioned a specific strategy working across the SMILE region (which runs from the Southwest through Texas, Florida and the Carolinas). “Over the past 10 years, urban infill has generally been less developed just because of where office and multifamily were,” he said. “If you look at our pipeline today, we’re approaching SMILE states and urban infill at a higher rate than we previously have.”

Schellhase said because office development is low and multifamily has slowed down materially, hotels are presenting an opportunity to become the best use in markets, especially where RevPAR is outpacing construction costs. “[They] seem to be more complicated and high-capitalization deals. But if you can figure out what that looks like, we think there’s a really interesting scenario, particularly where we see that some of the REITs are bringing forward takeouts. If you figure all that out, we think there’s an interesting opportunity there.”