LOS ANGELES— Over the past few months, hotel industry executives seem to have come to grips with the fact that the new construction pipeline is growing, meaning that the industry’s next cyclical downturn isn’t too far away, but yet still some ways off in most peoples’ minds. However, today at Jeffer, Mangels, Butler & Marmaro LLP’s annual Meet the Money conference in Los Angeles, a different type of warning sign materialized involving the capital markets, leading some to worry a little more about what’s on the horizon for the lodging sector. The conference began simply enough here at the Sheraton Gateway Los Angeles Airport Hotel with introductions by Jim Butler, chairman of JMBMs global hospitality group in Los Angeles, and presentations from Bobby Bowers, a senior vp at Hendersonville, TN-based Smith Travel Research, and Mark Woodworth, an executive vp at PKF Consulting in Atlanta. Bowers and Woodworth each noted that while the new supply pipeline is surely on the rise and the industry may have just hit its cyclical peak, there is still at least a couple years of continued growth ahead. “There are 176,000 rooms under construction, which is significantly higher than last year,” Bowers said. “But that’s still not a threat in the short term. And while RevPAR growth is slowing, it’s still good. It’s just slower growth.” Woodworth, meanwhile, added, “The easy money is behind us, but it clearly still remains a wonderful time to be in the hotel business.” With that said, the conference’s opening general session began with comments from the participants that exuded a confident, yet cautious approach to current hotel lending, which remains robust and inexpensive overall. “We’re seeing an abundance of liquidity in the capital markets for every asset type,” stated the session’s moderator, Dan Abrams, executive vp of iStar Financial in New York. “But we are in a time of uncertainty now it seems as we worry about new supply.” Nevertheless, panelists such as Jonathan Roth, principal of Beverly Hills, CA-based Canyon Capital Realty Advisors LLC; Marty Collins, president of Dallas-based Gatehouse Capital Corp.; and Doyle Graham, president and CEO of Houston-based Valencia Group, all noted how strong lending conditions remain for borrowers. “Pinch me, I must be dreaming,” Collins remarked. “I like the liquidity I see out there. Sure there’s a threat of overbuilding, but as long as RevPAR continues to rise, liquidity remains high and construction costs keep a damper on new supply, we can ride this out for some time.” Disrupting that optimistic scenario and serving as a warning sign for the industry, though, were the words of another panelist, Patrick O’Neal, the national products manager for hotels at PNC Real Estate Finance in Overland Park, KS. O’Neal explained that the recent shift in the commercial mortgage-backed securities market that was precipitated by the major ratings agencies as a response to undisciplined underwriting of real estate financing in general will have a dampening effect on what is now being construed as a frothy real estate lending environment. “The fact is there needs to be caution now because we are in a changing world as of last month,” he said, adding many lenders in the market have no clue what they are currently doing. “Referring to real estate in general, lending has been out of control,” he continued. “So the ratings agencies’ move can be considered a market adjustment. As a result, the price of funds just went up. We’ve been our own worst enemy. The ratings agencies have taken a stance to protect the bondholders, saying there’s too much risk. CMBS capital will still be available, it will just be more difficult.” Frank Anderson, the senior vp and international head of hospitality, gaming and leisure at HSH Nordbank AG in New York, who had noted that two-thirds of the lending done in the hotel market was “unstable financing” didn’t let O’Neal end the session on a decidedly pessimistic note, though. He
Jim Butler