Hotel Investing in the Uncertain Pandemic Climate

By Ahmed Kabani

As we commence a new quarter in 2020, facing heavy headwinds in the face of the new decade, it is more important than ever to develop a plan to work through this pandemic. There is still so much uncertainty, yet it is our responsibility as business professionals to develop a plan to prepare ourselves for the worst-case scenario.

The good news is, however, that our economy is taking action to assist our business. The U.S. Small Business Administration 504 program is providing loans with the same type of long-term, fixed-rate financing enjoyed by larger firms, denoted by interest rates equivalent to favorable bond market rates. Businesses are eligible for these loans if their net worth is less than $7 million and net after-tax profits are under $2.5 million. This could help smaller hotel businesses that do not have adequate reserves in place for such an unprecedented pandemic.

Communicating with Lenders

It is apparent that borrowers’ ability to service their debt is becoming increasingly more difficult with such a hiatus in travel. Thus, it is important for hoteliers to communicate effectively with lenders head-on. Now is as good a time as ever to contact your lender to prepare them for a potential payment delay or default. Reinforce your relationship by mentioning your history of good payment, explain what issues your hotel is facing right now, and what you are doing to address those issues. Go in detail about the demand drivers and STR reports of your property and give the lender a brief recovery plan. Most importantly, discuss your options with the lender for deferred payments. It is better for your relationship and, ultimately, your welfare that you are transparent early on with your lender.

Establishing Your Ground

Do not sulk in this period of low occupancy; instead, take advantage. Use this period to revamp your strategic plan. How long can you afford to withstand a zero-occupancy scenario? Should you consider selling off and shifting your investment somewhere else for the time being? Or do you hold through the pandemic? Meeting with an asset manager would assist in determining what path is right for you.

If you have decided that holding is the better option, spend some time reviewing business continuity plans to ensure that management is prepared for a worst-case scenario. Develop an action plan in case a guest or staff member reports symptoms or infection. Communicate this plan to all employees. If necessary, consult the local Department of Health for guidance about quarantining guests or staff.

Once the quarantine finishes, and everyone has spent weeks with barely leaving their homes, and it is safe to do so, they will travel. Hoteliers need to be ideally equipped to meet this sudden surge of travel demand. Reopening will not be a viable fit for every hotel. This is an important notion for owners to understand. The hotels that do reopen can expect major changes in operators and branding. Once the pandemic passes, the highest and best use for the hotel in terms of real estate may have drastically changed.

Funds Raising Opportunistic Debt

Some hoteliers may be deterred from selling off their hotel assets out of fear that we are entering a buyer’s market.  While purchasing volume is slowing down, there are numerous financial institutions such as J.P Morgan and Blackstone Group that are raising large amounts of capital for opportunistic investments. According to Anton Pil, head of global alternatives, J.P. Morgan, the company is raising $3 billion for real estate alone. “To get some of these markets functioning, you need a lot of capital. If you’re deploying $10 billion of equity, you’ve got to do big deals,” Pil said.

These companies are going to look at large portfolios of assets with great post-pandemic potential. Consider lumping your asset together with another local hotel owner to increase your chances of selling. Finally, with declining mortgage rates, this opens another dimension of investors looking to seize valuable investment opportunities in the current state of the market.

To conclude, as we slowly accept that the current situation might sustain for longer than we intended, it is ever important to make the right decisions. Have a sit-down with a professional asset manager to conduct appropriate analysis to evaluate the viability of your hotel investment surviving a low or no-income period. If you decide to hold, then it would be among your best interests to carefully redesign your strategic plan.

Ahmed Kabani is the SVP, investments, and a member of the National Hospitality Group in the Marcus & Millichap Miami Office. In his 11 years working in the industry, he has had relationships with an investment pool of more than 1,000 active hotel owners, investors, REITs and private equity groups.

This is a contributed piece to Hotel Business, authored by an industry professional. The thoughts expressed are the perspective of the bylined individual.

1 Comment

  1. When will SBA 504 begin providing loans again? Can you recommend the best SBA 504 lender to work with?