• Seismic shifts create opportunities

Will the pandemic, and the results of its enforced lockdowns, generate significant changes in real estate demand? Across the piece, those active in different sectors have been making their views known, over recent weeks.
Seasoned private equity investor and hotelier Barry Sternlicht gave his views during the presentation of quarterly results at Starwood Property Trust. The US listed vehicle has USD16bn invested across US real estate, leveraging the platform of Starwood Capital.
“I think housing will be down 100,000 units from peak, and I don’t see a lot of people starting anything spec in office,” he predicted. “Hotels will finish their construction pipeline – that’s actually too large.”
“I think the two areas where demand isn’t going to return to the levels it was anytime pre-COVID will be hotels and retail. Those are the two asset classes that – it’s true that you could get extraordinary deals, extraordinary spreads in those asset classes, but you’re going to have to predict the future that it’s not going to look like 2019, not for a while. I mean, there’s no question business travel will be injured for some period of time until air traffic’s restored and international travel comes back.”
The office market is looking to face big changes, as companies balance the experience of staff working from home, with the benefits of working together in offices. Mark Dixon, CEO of IWG, the company behind the global Regus serviced office brand, sees great opportunity in the disruption to working styles. “What the pandemic has done has been to do a better job than any marketing campaign we’ve ever done to really generate massive interest and demand for our services, in particular, in the home work, remote work and decentralized areas.”
“The growth of remote working and working closer to home will be huge in the future,” predicted Dixon. “It is universal. The only thing that slows it down, in fact, is they already had existing commitments – but they will make the change if they can now. Obviously, growing companies go immediately into this type of working. It’s definitely what their employees want and increasingly so now. So watch this spot. The ways people work are changing. There will still be a need for offices, it’s just that those offices are going to be used differently. There’s going to be much more use of flexible space and drop-in space. It’s going to be more distributed, more people working closer to home.”
At Starwood, Sternlicht said the issue would hit urban centres in the US. “I do think the big blue cities are facing some troubles and the pressures on real estate taxes on office properties will be tremendous because they’re big, you can still tax them. You can’t tax street-level retail and hotels are closed. I think it’s not even so much of rent fall so much as expenses going up.”
“I think you’re seeing interesting issues emerge in some office markets, mainly San Francisco and New York. San Francisco, nearly 10% of the space in Downtown is now up for sub-let.”
In a distinct contrast, senior executives at Blackstone see hotels and offices returning – but are more down on retail. Chief financial officer Michael Chae said hospitality and retail, which represent 13% of Blackstone’s portfolio, have been the most impacted areas. “In hospitality, there’s been encouraging early demand at certain key assets that have reopened, but corporate and group business travel will likely remain depressed for some time and we’re preparing for a long recovery.”
Chief operating officer Jon Gray said there would be opportunities. “If you fundamentally believe this is more cyclical in nature, as we do in categories like office or in hotels, then you should have a good opportunity to deploy capital. In retail enclosed malls, where we think the challenge is more secular, then we’re going to be more hesitant in putting out capital.” And he added: “I think the real opportunity still lies ahead of us in the private space.”
The big hotel owners Park and Host remain convinced that they can ride out a cyclical downturn. “We’re not retreating now and looking to go purely all suburban because the suburban seems to make the most sense today,” said Park’s Tom Baltimore. “The analogy that I would use is think about several years ago when everybody thought independent hotels in New York were the right thing to do. And everybody rushed to buy independent hotels. I don’t think that strategy worked out so well for many people.”
“I think the opportunity here is we think about rightsizing. I think there’s the opportunity again with supply – you have to believe there’s going to be a contraction.”
He views Park’s portfolio as having a defensive position: “It’d be near impossible to really replicate the portfolio that we have across many of the major cities in the US. So clearly, we take it on the chin right now given, one, given our product type and our distribution. But I would also say that when we get to the other side of this, whether that’s three months, six months or nine months, Park is going to be incredibly well positioned with an improved this operating model I think tremendous pent-up demand. And I think the opportunity for us to have outsized years of growth.”
At Host, CEO Jim Risoleo declared himself “excited to have entered a new cycle with the highest quality portfolio of iconic and irreplaceable hotels in the company’s history and likely in the lodging industry. When demand recovers, we believe that the quality of our assets, many of which will be newly renovated, will be a true differentiator.”
The brands, meanwhile, are scanning the horizon looking for more growth opportunities. For IHG, that does mean there’s a modest amount of key money on the table. FD Paul Edgecliffe-Johnson confirmed: “We will continue to use our balance sheet to invest in growth opportunities including the strategic use of key money and growing our enterprise capability through system fund investments.”
And CEO Keith Barr added: “We are starting to see an increase in conversion activity from owners as well with an uplift in conversion signings during the half.”
At Marriott, CEO Arne Sorenson believes the group’s quality and scale will sell its attractions:  “We’re probably putting less money, last key money than we’ve done in the past years for the projects that we are signing today.”
“I think when we get to the conversion market, in some respects – and maybe this is a little bit of wishful thinking – the relative value that is achieved by joining the portfolio like ours in a weaker market is more obvious, and therefore the need for key money is less powerful than it would be in a stronger environment where everybody is performing fine.”

HA Perspective [by Andrew Sangster]: There are contradictory messages coming from the leadership teams, perhaps understandably. First, there is the sense that hospitality real estate is in pain, real pain the like of which it has never experienced. But there is also the sense that now is a period of great opportunity. Which of these two outlooks dominates depends on the liquidity of the business the executives are running.
At Blackstone, for example, there is much confidence about opportunity. It has USD156bn of dry powder, a significant portion of the USD564bn of Assets Under Management.
In Q2 it still sucked in a further USD20bn of funds. The fourth real estate debt fund, for example, increased in size to USD7bn, significantly larger than the previous fund.
What also came out of the Blackstone investor call was that the future opportunities are going to be in the private market with the “brief window” of opportunity with listed companies having closed.
Among the opportunities is hospitality but Blackstone’s COO Jon Gray warned it was going to take time. “It’s hard to say exactly how long,” he said. “At some point here, businesses will transact. Opportunities will emerge. And the great thing about our model is we can be patient if necessary. And then when the opportunities emerge, we can move very, very quickly. And having that USD156bn of dry powder is very helpful”.
The outlook is thus one of pain and then, for those who are patient and well capitalised, one of gain. The timeline is far from clear but there is growing consensus that there will be little this year and it will be well into 2021 before activity builds a head of steam.

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