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Q&A: Wave of ‘Physical Distress’ In Hotels Still to Come, Warns Broker Bob Hunter

Q&A: Wave of ‘Physical Distress’ In Hotels Still to Come, Warns Broker Bob Hunter

While hotel transactions have increased from a trickle to a steady stream in recent months, not everyone is feeling the flow. Trophy assets in gateway cities are trading at pre-recession prices, while many distressed assets continue to languish.

Meanwhile, a new wave of physically distressed properties is emerging. Many owners are being forced to deal with significant property improvement plans that were neglected during the downturn, says veteran hotel broker Bob Hunter.

Jones Lang LaSalle Hotels estimates last year’s hotel transaction volume reached $10.5 billion in the Americas, up fivefold from an anemic $2.1 billion showing in 2009. The hotel investment services firm, which tracks asset sales $10 million and higher, forecasts the volume to reach $13 billion this year. The U.S. market is expected to be one of the most active globally.

Hunter, the CEO of Hunter Realty Associates, and Teague, his son and the firm’s president, believe the bid-ask gap has narrowed significantly and more transactions will follow this year and next.

Founded in 1978 by Bob Hunter, the Atlanta-based national hotel brokerage firm now has offices in seven locations across the country. The firm also hosts one of the longest running hotel investment conferences each year in Atlanta. The 23rd annual Hunter Conference is slated for March 6-8 at the Atlanta Marriott Marquis.

The duo recently sat down with Lodging Hospitality magazine to discuss the bifurcation of the transaction market and the state of hotel distress.

Stoessel: How do you define hotel distress?

Bob: There’s operational distress — where there’s bad ADR (average daily rate) and bad occupancy — and you can’t operate efficiently with that. The other side is financial distress. If you’ve got a nice hotel, a good brand, but you bought at the peak and financed the asset at 95% [loan-to-value] and it’s no longer worth its mortgage or the mortgage payment is so high, it’s hard to pay.

Stoessel: Which form of distress are you seeing more of in the market?

Bob: The reality is we’re looking at that second wave. The first wave was when lenders were doing “delay and pray.” Their prayers were answered in some ways because some value has come back. The property that was worth $10 million went down to $5 million and came back to $8 million. The magnitude of the distress is much less now.

Meanwhile, five-year loans made at the height of the market are now coming due. We survived that first wave of operational distress. The lender didn’t foreclose, and the sun is coming out again. Now it’s, “Hey, Mr. Lender, I don’t have the $8.5 million coming due on that mortgage.” In the past, there was a lender out there to refinance and give you the $8.5 million and pay off the first guy. But you turn around now, and there’s no lender.

Teague: We used to say any of the hotels built, bought or refinanced in 2006, 2007 and 2008 were underwater. It’s probably not 100% anymore because some have worked their way out.

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