Regardless of where the industry is in a cycle, there are always owners who are looking to buy and sell assets. However, owners are often uncertain about how to choose the best time to sell their assets. The answer is to sell for their specific reason, rather than trying to time the market.
Real estate owners are motivated to sell for varying reasons, including partner disputes over operations, differing financial goals by principals as time goes by, and having achieved original financial goals and are now ready to return capital to investors. Other circumstances include debt maturation in an environment that does not lend itself to recapitalization, renovation requirements that are not financially achievable, the loss of franchise with no plan for future operation, and a property that was refinanced previously, with equity being returned to principals.
Market Considerations
The current market is somewhat choppy, as it has many moving parts. Operational challenges, declining demand due to limitations on foreign travelers entering the country, trade issues, a slightly weakened domestic economy, inflation, high interest rates, deferred maintenance, etc., impact sub-markets and assets within them differently. Only a review of a property’s original goals and current financial operations can determine if these elements actually have a bearing on the decision to sell.
The positive news is that there is considerable equity available for purchase. Many potential buyers are still on the sidelines; they are monitoring deals so they’re poised to strike when they see a deal they like. Interest rates will be moving in a comfortable direction, freeing up more debt funding, which should push pricing. Lending sources are abundant, but loan-to-value ratios remain elevated. Buy versus build costs should only become more attractive. Properties offered for sale are at a cyclical low, pushing more attention to available assets. Franchisors are eager to make deals, which makes brand mobility more attractive.
Property values have fluctuated in recent months, but upper-tier franchised hotels in good locations still command top dollar. “Rule of thumb” metrics are no longer applicable; each asset must be evaluated with the analysis of recent comparable sales, location, potential new room supply, renovation costs, potential alternative uses, etc.
Purchasing a hotel is a more cost-effective option than developing a new one. Construction costs continue to soar for a variety of reasons, including demand and supply issues, a shrinking labor pool, and increased tariffs. Yield on cost analysis is forcing delay or cancellation of projects, driving more capital into the acquisition arena.
Questions for Owners
Now is a good time to sell, if owners can answer these questions:
- Is an exit truly in their best interest?
- Is the seller prepared for replacement or tax consequences? Have I discussed the issue with my financial advisors?
- Is the seller realistic in their understanding of the sales process, and are they prepared to accept market pricing?
- Does the seller trust their broker’s analysis?
As always, the seller should focus on their motivation to exit an asset, not where the industry is in the cycle. They should rely on their trusted advisors and execute once they have a clear plan.
