Real estate: Experts weigh risk and opportunity

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Dean Michael Johnson, left, joins faculty members and industry leaders at a recent Dean's Leadership Series event.

Is there any capital in the current marketplace? What will it take to get financing? When will markets return to normal? These and other questions were laid out on the table for examination by two elite panels of hospitality and real estate finance industry experts who met this week in conjunction with the International Hotel / Motel & Restaurant Show in New York City.

Cornell University’s School of Hotel Administration organized the high-level discussions, a Center for Hospitality Research Real Estate / Finance Roundtable held Nov. 10 at the offices of law firm Proskauer Rose LLP, and “Real Estate Capital: Where is the Money Coming From?”, the third installment in the Dean’s Leadership Series, which took place Nov. 11 at the New York Yacht Club.

At the roundtable two dozen hospitality industry professionals and Cornell faculty members shared their readings of three issues relative to the current economic crisis: the current state of lodging demand and supply; conditions in lodging capital markets; and the fate of existing lodging management contracts. Some key takeaways:

  • Lodging supply will continue to grow at between 2.5 percent and three percent per year through 2010, while demand for lodging will decline by approximately half a percent in 2008 and one percent in 2009 before growing in 2010. The industry is surprised at the level of demand weakness; the combination of demand weakness and supply growth will cause the U.S. occupancy rate to approach 58 percent in 2009, the lowest occupancy rate in over a decade.
  • Hotel prices will decline by over 25 percent in the short term as a result of the increased cost of debt capital and slower industry growth.
  • The U.S. government has taken an unprecedentedly proactive role in attempting to resolve the present credit crisis. But some concern was expressed about how such policies are implemented, since it is still unclear what assets the government will purchase. Introducing this uncertainty will have a negative impact on the market.
  • Most agree that future lending criteria will be more conservative, but within these strictures, some deals are still being made.
  • When a turnaround occurs, it will occur quickly.
  • Owners and operators seem determined to cooperate this time around in order to get through what everyone knows will be a very difficult period.

The Dean’s Leadership Series event drew a capacity crowd of senior leaders of the hospitality industry. Panelists for the early-morning session, held in the ornate Model Room of the New York Yacht Club, were Jack Corgel, the School’s Robert C. Baker Professor of Real Estate; Sally Gordon, managing director at BlackRock (which she said has $3 trillion under management and was referred to in a recent feature on National Public Radio as “the most important firm you never heard of”); Jim Higgins, CEO of Sorin Capital Management; Gary Kauffman, managing director, Prudential Real Estate Investors; Dan Quan, professor of real estate, Cornell School of Hotel Administration; and Frank L. Sullivan, Jr., managing director, ING Clarion.

Moderator Michael D. Johnson, dean of the School of Hotel Administration and its E. M. Statler Professor, put a variety of questions to the panel concerning the availability of capital, the forecast for economic recovery, and the valuation of real estate. Some key points from that discussion:

  • Predictions of the length of the current constriction on available capital varied from late 2009 to mid-2010.
  • The CMBS (commercial mortgage-backed securities) market will eventually return, but with more conservatively underwritten loans.
  • Negative impacts on the attractiveness of hospitality real estate investments, relative to other vehicles, include risk associated with occupancy, difficulty in valuing underlying assets, and some pending labor issues.
  • Current owners are not anxious to sell property, because offers have come down substantially.
  • Some felt that we have experienced a fundamental structural change infinancial markets and that recent events are simply symptomatic of frailties in past practices.

The School plans to issue a comprehensive summary of the Dean’s Leadership Series discussion.

The Dean’s Leadership Series was sponsored by Parasol Marketing Group and the School of Hotel Administration’s Center for Real Estate Finance, Leland C. and Mary M. Pillsbury Institute for Hospitality Entrepreneurship, and Center for Hospitality Research. Proskauer Rose LLP provided outstanding conference space for the Real Estate / Finance Roundtable.

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