Jones Lang LaSalle Hotels: Big Changes Are Coming— For Better Or Worse

NEW YORK— Jones Lang LaSalle Hotels sees a number of changes and scenarios in the offing as a result of the recent terror attacks. While some of those developments are perceived as positive, and others negative, all are expected to generate a considerable impact on the industry, economy and global marketplace. Building on a contention that “most economists agree the tragic events of Sept. 11 will likely push the U.S. economy into a recession,” several leading executives at Jones Lang LaSalle Hotels maintained “the recent terrorist attacks have effectively pushed U.S. hotel real estate into the bottom of the market cycle.” To that end, it was noted that such circumstances “present not only risks but definite opportunities for investors, owners and lenders.” In short, might an uncertain lodging arena be ripe for a buying binge of considerable magnitude and, if so, where might the market’s would-be grand deal-makers secure the necessary capital? It would appear the answers to such questions are still understandably cloudy… if not seemingly contradictory at times. As pointed out by Arthur Adler, the company’s managing director for the Americas, “the bottoming of virtually all hotel sectors in the Americas indicates a strong buying market will emerge.” In line with this assessment, Adler said that— in the public markets— hotel company values are immediately “marked to market.” As a result, he suggested the gap between bid and ask prices (that which has effectively stifled transactions to-date in 2001) will likely narrow. Moreover, vis-à-vis the broker complaint that there’s all-too-often a paucity of suitable product “on the block,” SVP Melinda McKay offered that “stock market shocks and fear over future earnings have the potential to encourage a hotel sell-down by institutional investors, who may now find themselves overweight in [a particular]asset class.” To this observation, McKay added that “given share-price volatility, the hotel giants that have traditionally been so competitive are likely to limit new acquisitions. These two factors combined,” she continued, “provide compelling counter-cyclical buying opportunities for capital-equipped hotel investors.” Accordingly, some might wonder whether the unfolding scenario could conceivably clear the way for more secondary and tertiary investors to get more involved in the hotel-ownership game. Certainly, it becomes a plausible question; one whose answer hinges primarily on accessibility of working capital. “Market uncertainty will be priced into hotel transactions in the form of higher discount rates,” Adler predicted. “In addition, lower loan-to-value [LTV] ratios and higher debt-service coverage [DSC] quotients will raise the overall cost of capital, further impacting pricing.” To this end, Adler emphasized that “gaining access to capital will be difficult, as lenders balk at uncertain cash flows and values.” Moreover, he surmised “lenders future appetite for hotel deals will be largely predicated by what happens to current loan portfolios.” Finally, Adler and McKay— and their associates similarly involved in pulling together the research for this report on the state of the industry in the wake of the recent terror attacks and the lagging economy which predated them— indicate that anecdotal evidence suggests lending will not materialize until the market shows some stability… and even then, the criteria will be more conservative.