I have been a hotel broker for 26 years and have been through many market cycles. I can state with absolute certainly that I do not know how to time market trends. When I think about this, I remember the movie Rudy, starring Sean Astin, when he was in the church praying he would get into Notre Dame. The priest comes and sits down with him and after being asked for his intervention said the following, “Son, in 35 years of religious study, I have only come up with two hard incontrovertible facts – there is a God, and I am not him.”
When someone in the hotel real estate business tells you they know the market trends, they don’t. There are many examples of late that we can point to this truth, but I will focus on one – the Shale oil markets. 18 months ago in June of 2014, the per-barrel price of Crude oil was $105. Today, oil is hovering at $30 per barrel. Oil has lost 70% of its value and many of the lodging markets that supported the demand have collapsed.
In early 2014, I was asked to value some mid-market hotels located in these areas. My value was based on a 20 cap and the price per room was still $270k per room. I called the owner and told him his hotels were simply unsaleable using standard financial methodology. The owner had every argument why they should sell at an 8 cap on trailing numbers and I told him he needed to hire a smarter broker than me. In early 2014, people were buying used camping trailers in Georgia and shipping them to the Dakotas and West Texas, and selling them for 3x the price just to house the oil workers.
No one in our business saw this significant shift happening. At the time there were estimates that certain Shale oil productions limits would last 25 to 30 years. Many lenders, hotel investors, and operators were building hotels as fast they could get the permits approved. Even today, there are hotels still under construction that were started last year and are yet to come on line.
If you look at this example of oil, CMBS maturities that are barreling (no pun intended) down the tunnel, 100+ bps increase in long term debt, the current pricing on lodging stocks, and we all should come away with one hard incontrovertible fact: we cannot read and predict the hotel real estate future with any meaningful level of certainty. KT