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Paul Zimmerman

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Significant Drop-Off in California Hotel Investments: Why, and What Lies Ahead?

There has been a significant drop off in hotel investments and acquisitions in 2016 as compared to 2015 levels. 2015 was an exceptionally strong year in terms of hotel investment volume, as California experienced a record year by almost any measure. However, as with most sales trends, there has been a regression to the mean. Closer inspection of the current hotel market and the availability of capital reveals a few of the reasons for this shift.

First and foremost, because the returns on hotel investments have become less and less attractive to many investors, there are fewer purchasers chasing deals. In particular, many Real Estate Investment Trusts (REITs) have simply exited the market altogether because they cannot achieve the returns they require for their portfolios. Fewer buyers in the market places downward pressure on prices and, in many circumstances, causes a disconnect between what sellers think their properties are worth and what buyers are willing to pay. Sellers that do not have to sell can pull their properties off the market and wait in hope of getting a better price.  

Second, lenders have become more cautious. Tighter underwriting standards that include less aggressive loan-to-value ratios and higher levels of sponsor equity have chilled demand for properties. Restrictive lending standards have become particularly evident in hotel construction lending. Additionally, some lenders simply have a loan portfolio that has achieved their maximum desired exposure to hotel loans.  

What lies ahead?  While there is some consensus as to what has caused the reduction in sales activity, future trends are not easy to predict. Not surprisingly, the market will be driven at least in part by the interest rate environment. Also on the horizon is a large volume of Commercial Mortgage-Backed Securities (CMBS) hotel loans expected to mature in the next couple of years. We anticipate that many of those will be difficult to refinance without the infusion of additional capital from the existing borrower or new money from a new investor or buyer of the asset. The number of hotel properties that CMBS maturing loans will force to market, and the resulting impact on sales activity, is difficult to estimate. Nonetheless, M&R will closely track market developments and share our observations and insight on this blog.    

This blog post is not offered as, and should not be relied on as, legal advice. You should consult an attorney for advice in specific situations.