The 7th annual NATHIC Conference (previously known as the Midwest Lodging Investment Summit) was held this week in Chicago and provided an interesting experience and a unique programming component for the conference attendees this year.

I have been attending the NATHIC conference this week in Chicago. In its seventh year, the conference was relocated to Chicago from Washington, DC, and has replaced what was previously held here as the Midwest Lodging Investment Summit.

The conference has a few new wrinkles over the other industry events that provided an interesting experience. One agenda item in particular was the “Shark Tank” competition between Michigan State, NYU and DePaul University.

Each of the teams was charged with creating a new brand concept and selling the idea to an esteemed panel of industry veterans. It was truly refreshing to see young, enthusiastic minds came up with regarding the age-old challenge of doing something different yet trying to satisfy a perceived market need, all while making it economically feasible. I also commend the “Sharks” for taking the high road when providing feedback on the presentations.

The teams all did a respectable job defining and presenting their concepts, but the presentations further confirmed my theory that the various hotel programs around the country need to incorporate more hotel investment material into their programs. Michigan State won the competition, but all the teams put forth a great effort.

A second differentiator was the Hospitality Real Estate Showcase, where various brokers had an opportunity to discuss their businesses and some current listings. This is the type of presentation that probably works best for the smaller conferences like NATHIC, but is an interesting programming component for conferences that are trying to be “about deal making.”

Some of the general themes from the panels and hallway discussions included the following:

Market

Smith Travel and Lodging Econometrics presented their data on market metrics and pipeline, respectively. The details here are not surprising to anyone.

Supply growth is picking up and developers of new hotels are taking advantage of increasing availability of construction financing on more attractive terms. While supply growth is expected to be about 0.8 percent this year, 2014 is estimated to see 1.1 percent growth.

In 2013, we’ve seen about a 16 percent increase in active pipeline deals. Almost all of the new deals included are in the Construction or Final Planning stages. That tells us that will see the impact of greater supply growth in 2015 to 2016. Most (66%) of the rooms under construction are in the upscale and upper midscale segments.

Demand continues to chug along at a growth rate in the low 2 percent range. This is expected to continue through 2014. ADR growth will be about 4 percent this year and slightly higher next year. All this is leading to RevPAR growth in the mid 5 percent range this year and closer to 6 percent next year.

What this tells us is that we are in the comfortable part of the cycle. Barring an external event, occupancy growth is projected to slow slightly, while ADR growth should continue. This translates to better overall operating metrics, driving more NOI growth for the foreseeable future.

Capital

Debt for cash flowing deals continues to be readily available on very favorable terms. CMBS loans are the most popular now as they provide the greatest proceeds at the lowest rates. LTV’s are inching up above 70 percent on solid deals, and originators are issuing term sheets with high 4 percent to low 5 percent interest rates. Sizing is done on debt yields from 10 to 11.

Combined with 25 to 30-year amortization schedules and greater flexibility on non-economic terms, it is the common view that owners should take advantage of the market and refinance assets, if possible, to lock in longer term favorable debt.

HVS Capital has also been successful lately at closing structured debt deals that include very attractive senior debt pieces combined with mezzanine debt, resulting in excellent proceeds at a low overall cost of capital. While life companies and other on-book lenders remain less active in a market seeking higher LTV’s, we’ve seen a smattering of transactions lately from these debt sources.

The question was posed during my final panel as to whether the panelists felt the market was “frothy” as in 2006-2007. Not a single panelist feels we have gotten to that point. All agreed that we are certainly seeing more aggressive terms generally, but that underwriting remains conscientious.

For transitional or “value-add” deals, bridge money for larger deals (above $20 million) is available as well on great terms. Unfortunately, the market for smaller bridge loans remains thin. Getting any transitional deals across the finish line requires strong, experienced sponsorship, a good story, a low cost basis, and a market demonstrating trends in the right direction.

Transactions

Hotel transaction volume for 2013 is expected to be about $18 billion, with most deals in the Upscale and Upper Midscale segments.

This compares with $13 billion in 2012 and $19 billion in 2011. The average transaction price per room is projected to be $196,000, a record amount. Buyers are scouring the top markets for values, but are also moving down to tertiary or lower markets seeking product. REITS have returned to the market and are making it tough sledding for private buyers in the top MSA’s.

So, the overall tenor remains positive, without the irrational exuberance we saw at the top of the last cycle. While very active and aggressive, the debt markets haven’t gotten “frothy.” The biggest concerns keeping investors and lenders up at night are rising costs, like payroll and health insurance, and potential for new supply.

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Readying your Hotel for Sale. - By William G Sipple

About William G Sipple

William (Bill) Sipple is executive managing director of HVS Capital Corp (HVSCC), where he leads a team of professionals that provide a wide range of real estate investment services on an international level. HVSCC is the investment banking arm for HVS, and has extensive experience in debt and equity raises, asset sales, and capital structuring. You can contact Bill at (303) 512-1226 or wsipple@hvs.com. www.hvscapital.com

Previously published in www.LodgingMagazine.com