Faculty & Research
Real Estate / Finance Roundtable
New York, NY, November 10, 2008: Real Estate / Finance Roundtable
Real Estate / Finance Roundtable Photographs
Real Estate / Finance Roundtable Program
Although the current recession has already dampened demand and deflated asset values, participants in the second annual Cornell Real Estate and Finance Roundtable see opportunities for astute investors and operators. The November 2008 roundtable, conducted under the aegis of the Cornell Center for Hospitality Research drew more than two dozen participants and was hosted by center partner Proskauer Rose at its New York City office.
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From left to right: Joel Eisemann, Executive Vice President, Owner & Franchise Services, Marriott International, Inc.; Mark Carrier, Senior Vice President, B. F. Saul Company Hotel Division |
The economic downturn and credit freeze unavoidably framed the roundtable discussions. Mark Woodworth, president of PKF Hospitality Research, said that his analysis forecasts weak demand through 2009, with a recovery in 2010. “Two factors are amplifying this demand weakness,” he noted. “First, reductions in employment will reduce business travel. Second, people need to appreciate the essential connection of airline capacity and hotel demand. Each 10.0-percent change in airline capacity means a 3.9-percent change in hotel demand.” PKF forecasts that hotels will lose approximately 1.0 percent of demand in 2009 due to airline capacity cuts.
Unlike past downturns, however, the industry is not awash in excess supply additions. Mark Lomanno, president of STR Global, explained: “We see 195,000 rooms under construction, or about 4 percent of supply. However, 40,000 rooms will close next year, thus mitigating the effects of new supply.” Lomanno said that the real question for the industry is whether the excessive discounting of the last recession will return. “Discounting lowers the bar for the entire supply, and everyone suffers—except consumers,” he said.
The relatively favorable picture on supply additions may be cold comfort to property owners. Gary Mendell, chairman and CEO of HEI Hotels and Resorts, presented his analysis of why asset values will continue to decline. Mendell anticipates a drop of 25 to 30 percent in hotel assets in 2009, based on an examination of the two key factors involved in asset valuation, which are cash flow growth and cost of capital. Both are moving in a direction that decreases asset values; cash flow growth is dropping, while cost of capital is increasing. Pointing to historical capitalization rates of 9 percent, other participants stated that asset values must drop by an additional 20 percent to return to that 9-percent level.
Looking at credit markets, Cornell professor Daniel Quan observed that the current credit crisis is vastly different from any previous period. Whereas past problems have resulted in credit rationing, this time credit has simply evaporated. Loans are unavailable to even superbly qualified borrowers, he said. Panel members agreed that the key issue of 2009 will be “refinancing risk,” when borrowers cannot find funds to pay off a maturing loan with a new note. Augmenting this problem, the large “syndication loan” market will be frozen next year.
While the downturn and credit freeze are painful, it may also bring a dose of reality to capital markets, according to roundtable participants. Michael Medzigian, Chairman and Managing Partner of Watermark Capital Partners, pointed to the "irrational” capital markets of 2006-2007. “Something was wrong when owners were borrowing 80 percent loan to value at just 110 basis points over Treasury rates,” he said.
In view of the risk from upcoming recapitalizations and refinancing, the hotel industry will present opportunities for those who buy well priced properties. The most active buyers may well be pension funds, life insurance companies, and hedge funds, in the view of Cornell professor Jack Corgel. He believes such unregulated lenders will have the advantage in financing transactions in the coming year.
The roundtables are invitation only events. Partners of the Center for Hospitality Research have a guaranteed seat at each roundtable. The roundtable was organized and chaired by Jan deRoos, the HVS International Professor of Finance and Real Estate at the Cornell School of Hotel Administration. Future center roundtables scheduled in spring 2009 will include current issues in hospitality design, labor and employment law, and marketing. The next Real Estate and Finance Roundtable is scheduled for May 2009.
Ithaca, NY, May 31, 2007: Real Estate / Finance Roundtable
Real Estate / Finance Roundtable Program
Far more quietly than is occurring in the stock market, private capital is replacing public equity markets as the source of growth in the hotel industry, according to participants in the first annual Real Estate/Finance Roundtable, held May 17 and 18, 2007, at the Cornell University School of Hotel Administration. The Roundtable was organized by Jan A. deRoos, Associate Professor and the HVS International Professor of Finance and Real Estate, and was sponsored by the Cornell Center for Hospitality Research.
Discussing the magnitude of private capital that is available to the hotel industry, Chuck Henry, President, of Hotel Capital Advisers, Inc., said, “There is no need to use the public markets to raise equity today.” Henry pointed out that this money is attracted to the hotel industry by the potential for solid returns, adding: “Waves of capital come into the hotel industry because investors are seeking returns superior to alternative investments, not because they love hotels."
In that regard, panelists concluded that the hospitality industry is drawing capital because investors are seeing low returns outside of real estate, but much of the real estate business itself has experienced a cyclical downturn. In contrast, the hotel industry continues strong.
In a session on hedging risk in hospitality portfolios, Jack Corgel, Ph.D., the Robert C. Baker Professor of Real Estate and Daniel Quan, Ph.D., Professor, introduced the concept of synthetic real estate to the panel. Professor Corgel discussed real estate hedging strategies, and Professor Quan introduced the audience to the HQuant Lodging Index (HLI) and derivative products that could be based on the HLI. For example, one could write options on the HLI to obtain hotel returns without owning the underlying real estate.
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Left to right: Chuck Henry, President, Hotel Capital Advisers, Inc. and Adam Birnbaum, Managing Partner, Grandwood Capital |
Turning their attention to mixed-use developments, Roundtable participants were divided on whether these developments are a fad or will be a model for future development. Skeptical participants pointed out the conflicts that are inherent in divergent developments, but others noted the logical pairing of certain concepts, such as lodging and vacation ownership.
Moreover, each development proceeds according to its developers’ needs, often with lifestyle brands and select service brands sharing one development. “There are no set rules for lodging in mixed-use developments,” pointed out Jim Fisher, Senior Vice President, Owner and Franchise Services, Marriott International, which is a center corporate partner. Using examples from Marriott’s portfolio, Fisher explained: “Today's developers seek to include a Springhill Suites in a mixed-use project that combines lodging, retail, residential, and offices uses; while others combine a Ritz-Carlton Hotel, Ritz-Carlton Club, and Ritz-Carlton Residences into a single master-planned development.”
Roundtable members also explored the value of brands in international hospitality growth. The key seems to be in matching the brand to the local culture. Noted Raj Chandnani, Director of Strategic Planning and Consulting, Wimberly Allison Tong and Goo (also a center corporate partner): “One size doesn't fit all. We've found significant differences in customer expectations and in owner's expectations as we have discussions with our clients around the world.” That said, Chandnani warned that global travelers expect consistency from a brand wherever they find it.