U.S. Office Rebound to Be Delayed by ‘Shadow’ Space, Rosen Says
Nov. 23 (Bloomberg) -- The U.S. office sector will be the slowest to recover as companies absorb empty space and advances in technology reduce the need for square footage, said Kenneth Rosen, a professor at the University of California, Berkeley.
Unoccupied “shadow inventory” accounts for 3 percent to 5 percent of total business leases, and that space will be filled before firms sign new rental agreements, Rosen, chairman of Berkeley’s Fisher Center for Real Estate and Urban Economics, said at a conference in San Francisco. Cloud computing and other tech advances let employees work away from offices, further reducing space needs, he said.
“Every company has shadow space,” Rosen, who also runs Berkeley-based hedge fund Rosen Real Estate Securities LLC, said in an interview yesterday. Most U.S. cities face prolonged vacancies because of the surplus, excepting Washington, New York, San Francisco, Boston and parts of the Silicon Valley, where technology and venture capital spur leasing, he said.
“If you’re in the knowledge-based industries such as VC, everything ‘green’ and social media, there is a large, growing demand for space,” Rosen said.
The average vacancy rate in U.S. central business districts fell to 14.7 percent in the third quarter from 14.8 percent in the second quarter, Cushman & Wakefield Inc. said last month. The overall rate including suburban areas rose to 17.5 percent, the highest since 1993, from 17.4 percent, according to the New York-based broker.
Prices for U.S. commercial property rose in September after falling to an eight-year low the previous month, Moody’s Investors Service said yesterday. Demand for the best office buildings in major markets pushed up the Moody’s/REAL Commercial Property Price Index 0.3 percent from a year earlier as investors sought returns higher than fixed income. Prices gained 4.3 percent from August.
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December 4, 2010
After a Rough Night, Hotel Investors Are Waking Up
Private equity funds and entrepreneurs like Richard Branson are hunting for deals in the hotel sector, and many are under the gun to buy earlier rather than later.
By JANET MORRISSEY, New York Times
IS this as bad as it gets? For two years, big investors watched the implosion of the lodging industry as hotel values plummeted more than 50 percent. Now as private equitygiants like the Blackstone Group and entrepreneurs like Richard Branson are diving into the sector, others are starting to think it has finally hit bottom and may be bouncing back.
Blackstone teamed up with two other private equity players in May to acquire the Extended Stay hotel chain out of bankruptcy court, and in September, Mr. Branson announced plans to create a Virgin Hotel empire. And when big names reach for their checkbooks, other investors usually aren’t far behind.
So far in 2010, there have been 77 lodging deals in the United States valued at $8.5 billion, according to the research firm Dealogic, up from 30 deals valued at $1.2 billion in that period in 2009. (This is still far short of the 2007 peak, when there were 141 deals valued at $42.3 billion — including the biggest leveraged buyout of a hotel ever, Blackstone’s troubled $26 billion purchase of Hilton Hotels.)
For the most part, private equity firms haven’t even cracked their piggy banks yet. “I have never in my entire career seen so much equity on the sidelines ready to pounce,” says Jim Butler, chairman of the global hospitality group at the law firm Jeffer, Mangels, Butler & Mitchell.
More than 40 private equity funds are hunting for deals in the hotel sector now, and many are under the gun to buy earlier rather than later, says Bjorn Hanson, dean of the Tisch Center for Hospitality, Tourism and Sports Management at New York University. About half had cash in hand for lodging investments in 2007 and early 2008 before the sector fell apart and have been sitting on the sidelines, while others have raised money in the last year.
All are under pressure to invest, lest they miss the opportunity to jump in before the sector goes into full rebound mode, when “everybody else gets in and prices get bid up,” says Mr. Hanson.
Private equity firms and real estate investment trusts have been building huge war chests over the last year as they seek distressed deals, in the hopes of picking up properties at pennies on the dollar, as many did in the early 1990s recession. Mr. Butler recalls that Colony Capital bought the Hyatt Regency Waikoloa in 1993 in Hawaii for about 12 cents on the dollar. Colony paid $56 million for a property that cost $465 million to build and then sold the property in 2002 for $180 million.
In the current downturn, many investors have been waiting for similarly troubled targets, which have yet to materialize. “I think opportunistic investors had those visions dancing in their head of assets that you buy at 10 cents on the dollar,” Mr. Butler says. But now many realize they may get distressed assets at only 60 to 80 cents on the dollar, and are afraid they’ll miss the rebound if they don’t jump in soon.
“Things will begin drifting up, if not shooting up,” Mr. Butler says.
Hotel deals began revving up after the lodging sector showed signs that it had finally turned a corner in the first quarter. Hotels posted year-over-year growth in occupancy in February for the first time since October 2007, and revenue per available room — a closely watched measurement of room-rate and occupancy growth — turned positive in March for the first time since July 2008, according to Smith Travel Research.
In July 2010, American hotels “sold 102 million room nights, which is the most room nights ever sold in one month,” noted Jan Freitag, vice president for global development at Smith Travel. “The worst is behind us.”
Some hotels have even begun selectively raising room rates in recent months, usually a surefire sign that the sector is on the rebound, and experts expect this to escalate in the next two years. At the same time, there’s little new construction because financing remains scarce, which will limit the number of new hotel rooms being dumped on the market in the next few years.
“We know we’ve reached bottom, and we know a recovery has started,” says Mr. Hanson of N.Y.U. “Now is the time to start to look seriously at acquisitions.”
Hotels Attract JPMorgan as Loan Recoveries Beat Other Properties
Nov. 29 (Bloomberg) -- JPMorgan Chase & Co. and Wells Fargo & Co. are seeking to increase financing for hotels as lenders recover more money from loans backed by lodging than from debt secured by other types of commercial real estate.
Lenders’ losses on non-performing hotel loans were about 53 percent this year through September, compared with 63 percent for retail property loans, 62 percent for industrial, 61 percent for multifamily and 57 percent for office, according to data from Trepp LLC, a New York-based mortgage-information provider. The figures exclude loans with losses of 2 percent or less.
A recovery in the lodging industry helped delinquencies on U.S. commercial mortgage-backed securities drop for the first time in almost three years last month, Fitch Ratings said in a Nov. 5 note. The revival is lifting hotel property values and enticing lenders to rework existing loans and seek out new ones.
“Right now is a particularly attractive time to be lending to the hotel sector,” Christopher Jordan, head of hospitality banking at San Francisco-based Wells Fargo, said in a telephone interview. “We prefer lending at the trough to lending at the top. Now you are at the front end of the upswing.”
The Hilton Times Square in New York City is among properties benefiting from the renewed interest in hotel lending, completing a $92.5 million, 10-year loan this month. The senior loan, which carries a fixed interest rate of less than 5 percent, was secured through Bank of America Merrill Lynch and replaced financing set to mature in December, real estate services provider Jones Lang LaSalle Inc. said Nov. 11.
‘Actively Seeking’ Loans
“It’s a true indication that lenders are actively seeking to place debt on high-quality, well-located hotels,” Jeffrey Davis, a New York-based executive vice president at Jones Lang LaSalle Hotels, based in London, said in a statement.
Hotel occupancies in the top 25 U.S. markets climbed to 65 percent this year through September from 61 percent in the same period in 2009, said Smith Travel Research Inc. of Hendersonville, Tennessee. Revenue per available room rose 6.3 percent to $75.79.
“We are definitely making loans on hotels,” said Jon Strain, head of capital markets for JPMorgan’s commercial real estate group. Revenue and occupancy “trends have been very strong across the U.S.,” he said.
The New York-based bank doesn’t break out its hotel lending. It had about $8.4 billion in loans tied to lodging, real estate investment trusts, homebuilders and other properties as of Sept. 30, according to the bank’s third-quarter filing with the Securities and Exchange Commission. That compares with $11.2 billion at the end of last year.
Wells Loans Rise
Wells Fargo had about $6.5 billion of mortgages or construction loans tied to hotels and motels outstanding at the end of September, according to its quarterly filing. That’s up from $6.4 billion a year earlier. The lender’s entire commercial real estate portfolio was $126.7 billion, or about 17 percent of total loans, as of Sept. 30.
CMBS delinquencies dropped to 7.78 percent at the end of October, down 88 basis points from the previous month, according to Fitch. Hotel delinquencies fell to about 14 percent from 21 percent in September, the largest percentage-point decline ever recorded by Fitch for any property type.
The resolution of seven loans greater than $100 million contributed to the decline, Fitch said. That included a $4.1 billion Extended Stay Inc. loan backed by a portfolio of 682 hotel properties. Extended Stay last year filed the largest bankruptcy by a U.S. hotel owner.
‘Very Attractive Investment’
“Hotels represent a very attractive investment opportunity because they’ve seen such a sharp decline,” Jonathan Gray, senior managing director and co-head of real estate at Blackstone Group LP, said during a conference in New York on Nov. 18. “We’ve been deploying a lot of capital in this area.”
Gray has invested $4 billion in distressed deals for Blackstone in the past year, including stakes in Extended Stay, mall owner General Growth Properties Inc. and Sunwest Management Inc., an assisted-living provider.
Rising prices for hotels and money raised in share sales by real estate investment trusts have boosted lender confidence in the lodging industry, said Jordan of Wells Fargo.
“REITs and other hotel buyers have been paying tomorrow’s prices today, particularly in some cities, like New York and Washington, D.C., so they don’t miss out on the opportunity to own those assets,” he said. “These transactions have been a window into the value of hotel properties and have injected confidence into the system.”
Eleven Hotels Trade
This year through October, 11 hotels have traded for more than $100 million each, up from three a year earlier, according to Arthur Adler, managing director and chief executive officer for the Americas at Jones Lang LaSalle Hotels.
Low interest rates also have helped keep loan losses lower on lodging because hotels, more so than other commercial properties, tend to be financed with floating-rate debt, according to JPMorgan’s Strain.
The highest loan loss on an individual property in the lodging sector this year through September was 86 percent. That compares to an individual loan loss of 112 percent in the multifamily sector, 110 percent in retail and 99 percent in industrial, according to Trepp data.
Losses can total more than 100 percent because such costs as legal expenses, appraisals, tenant improvements and court- filing fees often aren’t repaid.
“Part of the reason for lower loan losses is that the majority of hotel financing was done with floating rates,” said Strain of JPMorgan. “With the Fed injecting liquidity into the market, keeping interest rates low, a lot of the hotels are performing despite tremendous stress on them. Their interest debt service is low relative to the office and industrial sector.”
Losses on financing backed by midscale hotels or properties in suburban and rural markets are greater than those secured by hotels in metropolitan areas, said Paul Mancuso, vice president at Trepp.
“Loans backed by hotels in prime geographic locations are being modified more easily,” he said. “Some loans backed by midscale properties or hotels in suburban locations and tertiary and secondary markets, those loans are the ones that still have trouble.”
Morgans Hotel Group Co. in October won extensions for loans backed by its Hudson New York hotel in Manhattan and the Mondrian Los Angeles after paying down a portion of the money owed on the two properties. The company was able to negotiate a lower interest rate.
Boost Rents Quickly
Hotels have another advantage that other types of commercial real estate lack, said Morgans President Marc Gordon. They can boost rental rates quickly to take advantage of economic growth, while tenants at offices and retail properties tend to sign multiyear leases.
“Almost the entire tenant base of a hotel checks out every morning, and the operator effectively re-leases the building the next day,” he said. “With other commercial real estate, the operator usually has multiyear-term leases. As a lender, you don’t really know where rent rates will reset. At a hotel, a lender can see exactly how the hotel does operationally.”
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