PKF Capital’s Eaton Says Industry Must Reinvent Wheel

With a nearly 80 percent drop in hotel transaction volume compared to last year, many industry observers wonder when hotel sales volume will begin to rebound. Bob Eaton, addressing a conference sponsored by Hospitality Advisors in Honolulu recently, called on the hotel finance industry to “reinvent the wheel.” The executive managing director of PKF Capital, Inc., which provides real estate investment advisory services to the hospitality and leisure industries, recently talked about the environment for hotel financing, and what it will take to break the logjam. CPNHospitality: You have said the hotel finance industry must “reinvent the wheel.” What should the industry be doing? Eaton: We are simply saying: we are going to get fully prepared for the recovery of our finance markets and begin proactively dealing with the realities that exist in the market. Transactions are dramatically off, but this will change. Instead of wondering when things will get better, we know that it will get better and we are broadening our service platform now to include a dedicated hotel finance specialist. Things change and we are in a different environment now, but our clients need us to be proactive and fully prepared to act on their behalf as the finance and credit recovery unfolds. CPNHospitality: How serious is the debt crunch for hotels today? Eaton: It is difficult to source hotel debt today, but not impossible. There is a large degree of caution from the debt side of the business, with much stricter underwriting. Investors are in turn looking at property generally needing a lower price to maintain their returns. Because sellers today are coming to grip with a new reality, they are not readily accepting an outright decrease in value and are waiting for improvement over time. As loans begin to mature, sources will need to appear to meet these capital needs. CPNHospitality: What emerging trends are you seeing on the hotel finance front today? Eaton: New lenders need to come into the market that have more flexibility with respect to how they account for the loans on their books. The so-called “fair market value” accounting issues that many lenders are facing has caused them to seize up and stop lending. Private un-regulated lending may step in to take up some of the opportunities. We understand there are private capital pools being formed to become tomorrow’s hotel lenders. CPNHospitality: When do you see hotel investment volume picking up again? Eaton: We have no crystal ball, but we have been around long enough to know that investment in lodging will come back and the volume of transactions will come back. Why? 1) The financial/credit markets will find programs and approaches to providing debt for hotels needed in refinancing current debt and also in acquisitions or development. We have heard about the likelihood of pools of private capital in formation to provide debt for hotels. 2) The need to sell properties is often related to other non-financial factors, like estate planning, needed liquidly for new projects, etc.