Economic Uncertainty Forms Backdrop of Cornell Hospitality Real Estate Roundtable
Financing Freeze Magnifies Demand Drop as Key Industry Concerns
Ithaca, NY, Although the current recession has already dampened demand and deflated asset values, participants in the second annual Cornell Real Estate and Finance Roundtable see opportunities for astute investors and operators. The November 2008 roundtable, conducted under the aegis of the Cornell Center for Hospitality Research drew more than two dozen participants and was hosted by center partner Proskauer Rose at its New York City office.
Unlike past downturns, however, the industry is not awash in excess supply additions. Mark Lomanno, president of STR Global, explained: "We see 195,000 rooms under construction, or about 4 percent of supply. However, 40,000 rooms will close next year, thus mitigating the effects of new supply." Lomanno said that the real question for the industry is whether the excessive discounting of the last recession will return. "Discounting lowers the bar for the entire supply, and everyone suffers—except consumers," he said.
The relatively favorable picture on supply additions may be cold comfort to property owners. Gary Mendell, chairman and CEO of HEI Hotels and Resorts, presented his analysis of why asset values will continue to decline. Mendell anticipates a drop of 25 to 30 percent in hotel assets in 2009, based on an examination of the two key factors involved in asset valuation, which are cash flow growth and cost of capital. Both are moving in a direction that decreases asset values; cash flow growth is dropping, while cost of capital is increasing. Pointing to historical capitalization rates of 9 percent, other participants stated that asset values must drop by an additional 20 percent to return to that 9-percent level.
Looking at credit markets, Cornell professor Daniel Quan observed that the current credit crisis is vastly different from any previous period. Whereas past problems have resulted in credit rationing, this time credit has simply evaporated. Loans are unavailable to even superbly qualified borrowers, he said. Panel members agreed that the key issue of 2009 will be "refinancing risk," when borrowers cannot find funds to pay off a maturing loan with a new note. Augmenting this problem, the large "syndication loan" market will be frozen next year.
While the downturn and credit freeze are painful, it may also bring a dose of reality to capital markets, according to roundtable participants. Michael Medzigian, Chairman and Managing Partner of Watermark Capital Partners, pointed to the "irrational" capital markets of 2006-2007. "Something was wrong when owners were borrowing 80 percent loan to value at just 110 basis points over Treasury rates," he said.
In view of the risk from upcoming recapitalizations and refinancing, the hotel industry will present opportunities for those who buy well priced properties. The most active buyers may well be pension funds, life insurance companies, and hedge funds, in the view of Cornell professor Jack Corgel. He believes such unregulated lenders will have the advantage in financing transactions in the coming year.
The roundtables are invitation only events. Partners of the Center for Hospitality Research have a guaranteed seat at each roundtable. The roundtable was organized and chaired by Jan deRoos, the HVS International Professor of Finance and Real Estate at the Cornell School of Hotel Administration. Future center roundtables scheduled in spring 2009 will include current issues in hospitality design, labor and employment law, and marketing. The next Real Estate and Finance Roundtable is scheduled for May 2009.
Phone: (607) 255-3101
About the Center for Hospitality Research
The purpose of the Center for Hospitality Research is to enable and conduct research of significance to the global hospitality and related service industries. CHR also works to improve the connections between academe and industry, continuing the School of Hotel Administration's long-standing tradition of service to the hospitality industry. Founded in 1992, CHR remains the industry's foremost creator and distributor of timely research, all of which is posted at no charge for all to use. In addition to its industry advisory board, CHR convenes several industry roundtables each year for the purpose of identifying new issues affecting the hospitality industry.
Center Members: Accenture • Access Point Financial, Inc. • Barclaycard US • Cvent • Davis & Gilbert LLP • Deloitte & Touche USA LLP • DerbySoft • Four Seasons Hotels and Resorts • Fox Rothschild LLP • Hilton Worldwide • Host Hotels & Resorts • Hyatt Hotels Corporation • IDeaS Revenue Solutions • InterContinental Hotels Group • Jumeirah Group • Marriott International • NTT DATA • Preferred Hotels & Resorts • priceline.com • PwC • The Rainmaker Group • RateGain • ReviewPro • Revinate • Sabre Hospitality Solutions • STR • Taj Hotels Resorts and Palaces • Tata Consultancy Services • Wipro EcoEnergy • Wyndham Hotel Group