Smiles still outweigh grimaces as Lodging Conference opens

PHOENIX — The close-knit tribe that is the U.S. hotel investment community is reconvening after the summer break this week at the 28th annual Lodging Conference in Phoenix. And the smiles driven by strong operating performance are hiding most of the grimaces being generated by interest rate-related pain that is stalling development and creating refinancing challenges.

Development talk is still skewed toward conversions and that segment darling extended-stay. During the opening general session on Monday afternoon, panelists focused on positives with Wyndham Hotels & Resorts EVP and Chief Development Officer of North America Chip Ohlsson suggesting that “uncertainty is leaving the market” and “land prices are starting to come down.” He admitted new development is still a bit of a slog as developers still need to settle into the current interest rate environment, with other panelists agreeing that the rates seen a few years ago will likely not be seen again.

Sonesta Chief Development Officer Brian Quinn said markets proximity to oceans remains critical for development and cited markets such as Texas, South Carolina and Florida, adding that capital markets still tend to prefer lifestyle, luxury, extended-stay and premium economy opportunities.

IHG Hotels & Resorts Chief Development Officer for the Americas Julienne Smith added conversions are leading the way for her team. “They are cash-flowing assets, which gives lenders the security that there’s going to be something there when hotel reopens,” she said, adding that one-third of IHG’s pipeline are conversions.

But Smith also was not afraid to ring the development bell, suggesting they are still getting done with the right lending partners. “People are still leveraging relationships… and sitting on your land, your equity is not going to help you make money,” she said. “You need a cash flowing asset. So, at some point, perhaps you can refinance.”

“Chase the money,” exclaimed Choice Hotels International Chief Development Officer David Pepper. “Extended-stay is still the darling, can get financed and is performing well,” he said, referencing their Woodspring brand that is running 80% occupancies and 60% gross operating profits.

Chase the money. Extended-stay is still the darling, can get financed and is performing well.

David Pepper

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With 1% to 1.5% supply growth predicted for the next year and demand for travel continuing to look strong, both on the leisure side and increasingly on the business side, everyone is looking for acquisitions with so much dry powder sitting on the sidelines for longer than expected. Pepper said more deals are starting to happen, including bigger box, full-service hotels. The question is, he pondered, is how big will this opportunity become?

In private meetings, developers and lenders continue to say pending debt maturities are going to start moving the needle on transactions. Of course, that has been the headline for the past 18 to 24 months. Yet, there remains a dearth of deals.

This state of affairs is leading more investors to build their credit divisions with Peachtree Group recently announcing it has closed $556 million in loan originations of the $1.1 billion the company deployed year-to-date.

Peachtree Group Chief Investment Officer Brian Waldman said risk adjusted returns are currently stronger on the lending side than on development and he expects opportunities on the lending side to perhaps remain the better play into 2024 as debt maturities increase and bank interest rates remain out of reach or unavailable. They are also lending on development projects.

Notable credit transactions for Peachtree Credit Group include a $47.9 million first mortgage loan for the construction of a 215-room Autograph Collection hotel in Huntsville, Alabama.

More than 2,700 people are in attendance at the Lodging Conference with an economist and CEOs taking the stage Tuesday. Hotel Investment Today will report more on the proceedings in the days ahead.