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Investors Getting Ready To Bet On Hotels' Comeback

The Plaza Hotel in New York is closed amid the coronavirus.

Three months into the economic crisis brought on by the coronavirus pandemic, investors are optimistic about the long-term future of distressed assets in the hospitality sector. 

While many forms of retail real estate were already on the decline before the pandemic, the future for hotels, many of which are in distress now, looks bright in the long term, Square Mile Capital CEO Craig Solomon said during Bisnow’Putting Money To Work Amid The Crisis webinar last week. 

Solomon, whose company is an equity investor and commercial real estate lender, spoke on the webinar alongside Basis Investment Group Chief Investment Officer Kunle Shoyombo and Rialto Capital Management President Jay Mantz. Ackman-Ziff Real Estate Group President Simon Ziff moderated. 

“If I were to identify any asset class where the distressed opportunity was most extant and you could actually see a recovery and pro forma, it would have to be hotels,” Solomon said. 

Where investors choose to put their money toward the end of this year and into the next will largely be determined by how an asset class was doing before the crisis hit and whether indicators show that it will bounce back, Solomon said.

“I think the danger in rushing into the market is making sure you can distinguish that which was sick before COVID and that which is sick as a result of COVID,” he said.

Solomon said Square Mile Capital won't invest in hotels again before October, but he hopes that it will before the end of the year, he said. The investment firm will most likely invest in hotels and other hospitality properties in 2021 and 2022, he said.

Conversely, investment even in retail spaces such as malls, even in the medium and long term, seems risky considering the distress those properties have experienced in recent years.

Clockwise from top left: Basis Investment Group Chief Investment Officer Kunle Shoyombo, Ackman-Ziff President Simon Ziff, Square Mile Capital CEO Craig Solomon and Rialto Capital Management President Jay Mantz.

“Retail was having trouble before COVID. That hasn’t changed; COVID just made it more pronounced,” Shoyombo said. “But hotels are a different animal.”

Investors are also optimistic about the thriving industrial sector. In a move that has been dubbed the barbell approach, many are looking to invest in distressed assets for potentially high returns while simultaneously investing in steadier assets such as logistics centers for e-commerce companies for secure cash flow.

The panelists also discussed what investors have prioritized since the onset of the crisis and what they expect to see throughout the rest of the year. Investors have been largely playing defense on many of their assets since March by working with their borrowers and keeping their institutional investors in the loop, Solomon said. 

Borrowers are in a better place than they were during the Great Recession, Mantz said. 

“One of the big things that is very different going into the financial crisis, the borrowers have a lot more equity in the projects,” he said. 

Moving forward, investment will begin to pick up, Mantz said. He predicts that the structure of loan terms and rates will reflect the period of uncertainty.  

“I think it's very hard right now, with the uncertainty with assets you would deem truly stabilized, to see a lot of extension of the 10-year, fixed-rate credit right now," he said. "It’s going to be more floating rate and short return."

But he predicts this will level out and stabilize over the next couple of years. 

“I think if we turn the corner of the year, maybe at the end of 2021, I think you will see the return of 10-year, fixed-rate loans,” he said. “There is no question rates are going to be very low, so the borrower would be remiss not to borrow for 10 years sub-3.5%.”