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Morgan Stanley’s top hotel industry analyst says the investment environment in the lodging sector should continue to be favorable for commercial real estate investors, as it’s cheaper to buy hotels and borrowing rates are on the decline.
Michael Bloom, Morgan Stanley’s global head of gaming and lodging investment banking, pointed to the recent volume of hotel lending and declared in a recent webinar that the sector is facing a “better environment.” .
CRE’s overall recovery from the pandemic has been uneven, with offices still experiencing challenges, but hotels showing decent growth. Occupancy rates rose to 63.0% last year, not far below the pre-pandemic 2019 rate of 65.7%, according to the National Association of Realtors. This represents a significant increase from 2020’s low point of 49.1%.
Additionally, Chris Darling, head of U.S. lodging and gaming research at real estate research firm GreenStreet, which sponsored the webinar, said there are signs that deal activity is picking up. About 100 financings have taken place in recent months, benefiting from lower interest rates as the Fed signals its tightening campaign is over, according to GreenStreet figures.
Bloom said one factor is that hotel acquisitions and financing are generally “cheap.” He pointed to Caesars Entertainment’s recent $3.5 billion financing, which yields just 225 basis points compared to comparable U.S. Treasuries. “This is the tightest spread in B credit that I can remember,” he said. Although spreads have tightened overall, this is certainly a bargain. The average spread for B-rated companies was 333, down from 471 in October.
According to a report by commercial real estate firm CBRE Group, lodging prices are down 7% from their peak, which is much better than the 35% drop in office prices. Revenue per available room (RevPAR), a standard financial metric for hotels, is expected to grow 3.0% this year, slightly slower than the estimated 4.6% in 2023, according to CBRE. There is.
One oddity, Bloom said, is that public capitalization rates, which track investment returns (income divided by asset value), differ from private capitalization rates, as evidenced by real estate investment trusts. It is said that there is a difference between The private cap rate is 9.4%, which is 1 percentage point higher than the public cap rate. What this means is that public investors are less optimistic than private trading professionals. The FTSE Nareit index of hotels has fallen 1.6% this year, after posting a strong 23.9% rise in 2023.
“There’s a lot of capital sitting on the sidelines,” Bloom said. “That’s why the value of hotels will rise in the future.” He pointed to “consumer durability” – hotel guests returning after the pandemic ends. He added that large chains have demonstrated “scale is powerful,” citing Marriott International’s acquisition of Starwood Resorts in 2016. Since then, sales and profits have grown rapidly, and Marriott’s stock price has more than tripled.
Still, certain markets today, particularly those in San Francisco and Portland, Oregon, still have problems due to crowded business districts. “They’ll come back, but that’s five years away,” Bloom said.
Lodging is a significant, if far from overwhelming, part of the CRE market. Public pension funds own 10% of real estate, according to the Boston University Retirement Research Center. No further breakdown of pension fund holdings was provided, but the Green Street Index showed hotels accounted for 7.5% of total CRE space.
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Tags: Caesars Entertainment, Cap Rate, Chris Darling, Commercial Real Estate, Green Street, Hotel, Lodging, Marriott, Michael Bloom, Morgan Stanley, Office, Real Estate Investment Trust
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