Reit-ville versus Reality-ville
It seems the hotel asset markets have evolved into two very different worlds. Where will you live?
The Tier I Hotel World (proposed name of Reitville) of assets in gateway city markets with some level of growing in-place cash flow has officially seceded from the rest of the industry. They wanted better asset pricing, cheaper and higher leverage debt, and no longer wanted to be associated with tiring concerns about a slow recovery. They got it all?the secession was completed without resistance?as capital sources have agreed to all terms.
Lenders are applying in droves for visas to Reitville, where they are able to get the pricing they cannot get in the core commercial property markets. Of course, REITS want in?many awash with capital and building the backbones of their portfolios in top key markets. At the same time, high-net worth investors?both domestic and international?see this as a great cycle opportunity and are joining the party.
Together, this debt and equity is overwhelming the scarce supply of quality assets available?and this scenario will continue until visa applications to Reitville slow down. How can you not like this world?unless, of course, you can?t get a visa (which allows you to buy on a three-year forward 7% cap rate)?
The other world, the Tier II Hotel World (proposed name Realityville), appears to be a somewhat darker place on initial inspection (and investors would like to keep it that way for a while). Lenders seem to be focused on in-place cash flow (whatever that is) and don?t know how to spell ?value enhancement.? International investors, as well as the newer REITS and funds, don?t show these markets on their maps and people keep worrying about a double dip or otherwise slow recovery–miserbale bunch.
For most investors without visas for Reitville, Realityville will offer a growing world of opportunities for the next three to five years. Liquidity is still largely constrained?assuring that for investors with capital and a platform as well as the ability to roll up their sleeves and add real value?this is where they will ultimately find the greatest investment targets at the beginning of a long cycle.
Investment opportunities will increase across both worlds as lenders and owners move to dispose of assets or loans, recognizing the rapid improvement in pricing already evidenced in the Reitville. For most, the ?generational buying opportunity? in Reitville never happened, but the season is opening for platform buyers in the Realityville.