Distressed But ‘Stressed’: Investors See Hotel Buying Opportunities Coming

Last week, a foreclosure notice was filed for one of the most high-profile hotels in Washington, D.C.: The Waldorf Astoria, formerly known as the Trump International Hotel.

The property’s leaseholder, CGI Merchant Group, defaulted on its $285 million loan in February, and a foreclosure auction is now scheduled for next month.

Industry experts believe that this situation could be an early sign of distress affecting the hospitality sector both locally and nationwide. During Bisnow’s Mid-Atlantic Hospitality Summit held at the Washington Marriott Capitol Hill, panelists discussed the challenges and opportunities facing hotel investors.

Acquisitions: The Key Opportunity

In an environment where capitalizing on new developments is challenging, hotel executives are eyeing acquisitions as the most promising avenue. The Federal Reserve’s decision to maintain high interest rates has created a unique scenario: owners facing financial pressure are increasingly willing to sell their properties. As a result, buyers can expect steep discounts in the market.

Stressed Market vs. Distressed Market

Peachtree Group’s Senior Vice President of Acquisitions and Dispositions, Michael Bernath, emphasizes that this isn’t necessarily a distressed market but rather a stressed one. Many property loans, initially financed at historically low interest rates three to four years ago, are now coming due with significantly higher rates. This situation forces property owners to make tough decisions, leading to increased sales activity.

Refinancing and Opportunities

LW Hospitality Advisors’ co-founder and President, Daniel Lesser, points out that numerous markets are witnessing hotels coming up for refinancing. Some properties are transitioning from a 3% interest rate to much higher rates, even reaching double digits. While sales haven’t surged yet due to interest rate disparities, Lesser believes that any rate reductions will attract eager buyers.

The Role of Sales in Distress Management

Panelists agree that sales will play a crucial role in addressing distress. Unlike previous cycles, many lenders are not keen on taking direct control of distressed properties. Banks are cautious about becoming property owners, and executing a takeover is more complex than it appears on paper.

Challenges for Lenders and the Dark Horse Strategy

Pebblebrook Hotel Trust’s Senior Vice President of Asset Management, Kari Carr, highlights the difficulty lenders face when transitioning from debt-side to equity-side management. Taking back assets isn’t always beneficial for the property, especially when it comes to renovations and capital expenditures.

As the market evolves, the strategy of acquiring distressed hospitality assets and repositioning them may emerge as the dark horse. Office conversions and creative approaches could yield intriguing opportunities in the coming months.

Looking Ahead

The next six to twelve months will be critical for hotel assets. Keep an eye on refinancing trends and watch for potential investment openings. The market remains dynamic, and investors who navigate these stressed waters wisely may find hidden gems.

Note: This article is for informational purposes only and does not constitute financial advice. Always consult with a professional before making investment decisions.