Arena, Värde see short-term hotel recap opportunities in secondary markets

The firm is seeing distress creep in as the covid-19 pandemic continues to tamp down recovery.

Real estate private equity managers that include Arena Investors and Värde Partners are seeing opportunities to provide short-term financing for downtown hotel properties that have faced a slow return of business travel.

Downtown hotel properties, particularly those in secondary markets, have seen a return of leisure travelers, but are still awaiting a larger-scale return of corporate users, Don Moses, managing director at Arena, told Real Estate Capital USA.

Arena is seeing a strong divergence between the amount of capital available for troubled hotel properties in primary and secondary markets, with the San Francisco-based investment manager waiting patiently for opportunities to step up in non-major metros.

“We have seen the capital markets [respond to] not-so-pristine deals [in primary markets] but deals in secondary markets that have slightly higher leverage than a traditional bank or securitizing debt fund might look for [have seen] less activity. We see this as one area that presents a lot of good opportunity for us,” Moses said.

The firm is zeroing in on a handful of specific situations, Moses added. “There’s a lot of defaulted notes or properties being sold at big discounts,” he said. “We are also seeing a lot of recently constructed hospitality that needs to change flags, and that’s having a hard time attracting capital in sufficient quantities to execute a business plan.”

Lingering impact

The impact from the covid-19 pandemic can still be felt, particularly in downtown hospitality properties, Manny Grillo, a partner at law firm Allen & Overy, told Real Estate Capital USA.

“[Downtown] is where you’re seeing the greatest difficulty,” Grillo said, adding that this trend does vary by region. “There’s a lot of restructurings for these downtown-type hospitality assets in different markets, where they rely on tourists and corporate [travel] as well.”

Hotel properties have seen delinquency rates rise and this won’t change until there is a more wide-spread recovery.

“The hotels and other hospitality properties that rely on conferences or visitors is where we’ve seen the biggest hit, and a lot of them have not yet recovered because a significant piece of their income hasn’t come back yet.”

Aiming high

Värde Partners believes that high-quality downtown properties present the best value within the hospitality sector right now. This is a shift from prior to the pandemic, when the firm had less interest in the sector.

“Coming into 2019, we were underweighted in the hospitality space,” Jim Dunbar, a senior managing director at Värde Partners, told Real Estate Capital USA. “What we’re seeing from a supply perspective within that space today is very much overweighted in hotel just because of the drastic impact that the pandemic had on the hotel space and the lack of travel.”

As user demand has increased, the effect has been felt in different parts of the lodging sector.

“There’s also a range of what we think are trophy assets, very strong assets that have some type of business component to them,” Dunbar said. “Those buildings are going to have a slower recovery, but we are able to help bridge borrowers to that recovery, with the loans that we’re providing.”