Calling all deal makers: California needs you back!

Welcome to the Apex Assessment!  Thank you for embarking on this journey with me.  Do you love hotels as much as I do?  Probably if you are reading this.  But if not, I will aim to convert you with my passion and prose as I dive into many of the most interesting and complex issues facing hoteliers today.  

Thanks for reading! 

Buckle up for the 2023 roller coaster ride we call the open market.  In 2022 there were 482 hotels sold in California, an average of just over 40 per month.  A good transactional year by all markers.  Through the first seven months of 2023 . . . there have only been 115.  That is just over 16 transactions per month or a 60% decrease in hotel sales in the state of California year over year.  It’s safe to say that times are a changin.  So what’s happening?

The answer to that question is like a teenager's facebook relationship status; it’s complicated.  The old adage of those who hold the money makes the rules still holds true.  And right now those rule makers are mainly lenders.   I would love to tell you that it’s a buyer’s market or even a seller’s market.  Realistically, it’s a lender's market.  The recent interest rate hikes have decimated underwriting.  Owners with variable rate loans are experiencing a diminishing NOI and a shrinking bottom line.  Even just operating hotels and finding any decent talent in the workforce has never been more difficult.  

Buying a hotel is mostly based on reason and logic, not ignorance and fantasy.  If the numbers work and you can underwrite the deal, let’s buy it.  Even if the Profit and Loss looks a little tight what the hell . . . we’re buying a hotel in California!  This attitude stems from the California dream of appreciation and profits in hospitality real estate.  Now more than ever, the reality of buying a hotel seems to come with more scrutiny.  No longer are most buyers willing to just risk a purchase on a property when the revenue can’t justify the asking price.  More importantly, that deed of trust that almost every buyer relies on will never materialize if the DSCR (Debt-Service Coverage Ratio) can’t justify at least 125% of Net Operating Income (NOI) against the annual loan payment.

If you want to sell your hotel there are plenty of qualified buyers just waiting to deploy capital but here are some facts as I see it regarding the current California market*:

• Revenue is the king of all hotel valuations right now.  I promise you any qualified buyer and the bank do not care about your 2018 and 2019 revenue.  What have you done for me lately?
• Unless something makes your property unique and special, hotels are generally trading in the 3.5 to 5 multiple of your MOST RECENT 12-month gross revenue performance.  Above that, the DSCR just won’t pencil out with the current interest rate.
• When the City or County or Project Homekey bought your buddies' dusty roadside motel for 300k per key in 2021 that was a fluke.  Even Homekey is now looking at deals with more scrutiny. Needless to say, these reckless purchases have upended the sales comp market and should be thrown out.  Sorry sellers, it’s just unfair to buyers not named Uncle Sam. 
• You have to know your true motivation (or lack thereof) as a seller.  Are you motivated to transact at a Fair Market Value and do you actually understand fair market values?  Or do you just have a number in your head and if a broker finds that diamond in the haystack, you will sell.
• The current cap rate should be equal to or higher than the current interest rate.  Period.

If you just did some quick math and there is no way you would sell your property based on the above information, then don’t sell.  Hold on for a couple years and call me when that California dream of a strong hospitality market has returned to reality.  Trust me, things will get better.  

But right now . . . we all have to be smart with where we spend our time.  If I can’t sell your hotel, I don’t get paid.  A harsh reality and a truth I had to accept when I punched my ticket on this crazy train.  I’ve been lucky, truthfully, I have.  But isn’t luck just something you find at the crossroads of hard work, opportunity, market research and preparation?

I’m excited for buyers and sellers to see eye to eye again.  I’m excited for the power to shift from the banks and back into the hands of the principals.  Transactions are still happening and I’m grateful to be a part of a select few this year.  For now, let’s try to be realistic, that means all of us.  No, your mid economy exterior box is not the Taj Mahal of central California.  No, you can’t buy a Marriott at a 12% cap rate.  I know I’m probably not getting 6% for my brokerage services either.  When we all give a little, we can gain a great deal.  Strive to be realistic in your approach and regardless of the outcome, always move forward with kindness.

To all my deal makers out there, thanks for reading and here’s to many closings in our very near future.

Questions or comments?  Let me hear it!  peter@ApexLodgingAdvisors.com or (303) 883-6788.