As Hotels Struggle with COVID, Marcus & Millichap is Finding Investor Opportunities

Chris Gomes, the firm's senior managing director of investments, recently helped investors close nearly a half-dozen hotel transactions, enabling buyers to capitalize on an impending SBA incentive deadline. It's been our "most exciting two weeks since April," he says.

COVID-19 has battered businesses through much of 2020, hitting the hospitality industry particularly hard. As hotels experience historically unprecedented losses, investors are looking for opportunities.

Chris Gomes is helping these investors navigate the uncertainty. The biggest challenges: asset valuations, incentive deadlines, and a divided Congress. And of course, the continuing coronavirus crisis.

Gomes, who is senior managing director of investments at Marcus & Millichap, is among the experts in our commercial real estate feature “21 on 2021.” Read his rundown on what’s next in a Q&A.

How are you handling economic uncertainty and changes in the hospitality market?

The extreme uncertainty faced by hospitality investors has reiterated the importance of information, insight, and communication. In my interaction with hundreds of investors across Texas, I’ve been able to share information and best practices to help my clients grapple with the numerous headwinds. One particular area of challenge for owners has been asset valuations. Never in the history of the hotel industry, even the multi-year Great Recession, has there been a period where hotels were completely empty—or even close to empty. Due to the pandemic, some owners have been forced to shutter their assets for several weeks in a row. Valuations are further complicated by the unknowns of when a medical solution will come into play and when the market will return to more normal operating levels.

To help investors assess valuations and make better-informed decisions, my team has developed several models based on a variety of market recovery scenarios and the limited number of post-COVID transactions that have taken place. Still, there is considerable uncertainty and many factors that can radically shift valuation in the current climate.

What pandemic -related changes in hotel properties could last?

Elevated hygiene and sanitation procedures are likely here to stay. Contact-free and touchless features, such as online check-in and check-out and keyless entry, will largely become the standard across all franchises. Other measures taken by the industry to ensure customer safety during the pandemic—including the closure or scale down of complimentary breakfast, evening social and happy hours, in-room mini-bars, turndown service, and even room service—will be eased in due course as those services return.

What current or upcoming projects are you excited about?

In the last two weeks [early October], my team helped investors close nearly a half-dozen hotel transactions, enabling buyers to capitalize on an impending SBA incentive deadline. This has been our most exciting two weeks since April. Although we supported several clients in September, the sector will face a very challenging fourth quarter if Congress fails to provide additional relief to the industry. Without additional help, hotel assets will face severe financing and liquidity hurdles that could restrain investors’ ability to buy or sell hotels for the rest of the year and into 2021.

Our team also is actively engaging in conversations and preparing BOVs [broker opinion of value] for special servicers, lenders, and some debt funds.

If the situation gets any worse, the flood gates may open, and we may see several distressed assets come to market. Currently, lender activity is light, but it’s gathering steam in certain markets, such as Houston. For investors with strong liquidity, this could offer an opportunity to acquire quality assets at a discount and thereby reduce their average price per room across the existing portfolio. When these investors eventually exit, they will be able to come out ahead or at least offset some of the losses incurred during the downtime in 2020.

The interview has been edited for brevity and clarity. A version of this story first published in the Fall 2020 edition of the Dallas-Fort Worth Real Estate Review.

Sandra Engelland contributed to this report.

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