No Shortage Of Money For Hotel Investment, Only Opportunity
Chicago’s hotel market continues to soften in 2018 but that has not swayed investors from flooding the capital markets with money, chasing dislocation in the market.
The panelists at Bisnow’s Chicago Hospitality Summit Wednesday said the pool of investors seeking hotel opportunities is greater than it was a few years ago.
On the debt side of the stack, Oxford Capital Group principal Sar Peruri, speaking in front of a crowd of 250 people at the University Club of Chicago, said there is arguably more liquidity in the construction market, compared to a couple of years ago. Peruri recounted the hoops Oxford jumped through to land the construction financing for Essex on the Park in the South Loop. He said lenders were unwilling to step up to the plate because the mixed-use project, including multifamily and hotel, was more complex to underwrite.
Now Peruri is seeing more debt funds in the space and lenders are willing to take a lower yield because of the competition.
"The overall cost of debt is higher, but there more options for attractive projects with strong sponsorship," Peruri said.
Angelo Gordon Managing Director Chris Oka said although there is a lot of liquidity in the market, his firm keeps its capital stack simple. Angelo Gordon provides the vast majority of equity for a transaction, and partners with an operator to co-invest. Oka said Angelo Gordon is not a long-term owner. It typically underwrites for five-year holds and is constantly keeping tabs on potential buyers when it is time to execute an exit strategy.
Scarlett Hotel Group principal Zio Pekovic said it will be important to pay attention to interest rates moving forward, because they are creeping upward. While spreads are still fairly consistent, the interest rate for 10-year Treasury bonds hit its highest point since 2011 on Tuesday. Pekovic said Scarlett sealed some loans two years ago at 4% interest rates, and he has seen more recent loans close in the 5% range.
There are aggressive lenders in the marketplace looking to place capital. As interest rates inch upward, Pekovic said it is key that investors choose the right deal to fit that capital.
The lending landscape in the equity market is very tight. Arbor Lodging Partners CEO Vamsi Bonthala said he partners with private equity and family office funds for Arbor Lodging’s transactions. Family offices are especially interested in direct investment and yield. If these funds can find opportunities to lock in long-term debt at still-relatively low interest rates, they are doing so. Private equity funds, conversely, are more interested in short-term holds and are more thoughtful investors. What Bonthala finds interesting is pricing has not exploded, given how much capital supply is available.
Another topic of discussion centered on making hotels that appeal to millennials. Maverick Hospitality Group founder and CEO Robert Habeeb said millennials are the most debt-laden group of Americans in history and, as such, are more value-oriented than their baby boomer and Gen-X counterparts.
For Habeeb, that value starts with understanding the extracurricular trends of this generation and its demand for authenticity. At the Curio hotel Maverick is building at Navy Pier, Habeeb said the ratio of food and beverage service to hotel rooms is 60% F&B, 40% hotels. It is about creating an experience and the Curio's weighted food and beverage options will complement what already exists at Navy Pier, while also attracting millennials to Illinois' second most popular tourist attraction.
Hickory Street Capital Chief Financial Officer Eric Nordness said creating that authenticity is a balancing act. At the Hotel Zachary across from Wrigley Field, Hickory Street looked to make the hotel part of the greater campus Hickory Street built outside the Friendly Confines, a campus that neighborhood residents could enjoy year-round. That involved extensive planning. Nordness said it would have been easy to name the hotel after Cubs legends like Ernie Banks or Ron Santo, but naming it after Wrigley Field architect Zachary Taylor Davis connects it to the ballpark and neighborhood.
"Whatever the product might be, millennials will spot a fraud immediately and you will lose," Nordness said.