It’s hard to sell hotels. Here’s why Certares likes that environment.

Editor’s
note: This is the second part of a two-part interview with Nolan Hecht, senior
managing director and head of real estate for Certares. Part one focused on
Certares’ sale of the East Miami hotel and its acquisition of the majority
stake of the Hyatt Regency Greenwich from Trinity Investments.

NEW YORK CITY — Nolan Hecht knows a lot about buying and selling hotels. He said it’s
especially hard to sell right now, but he also thinks that situation can create
buying opportunities for companies like his.

“In
my career, some of the best buying opportunities have been while others have
been on the sidelines,” said Hecht, senior managing director and head of real
estate for New York City-based Certares.

Last
week, Certares had a notable sale with the East Miami hotel (which it owned with
Trinity Investments) to Blackstone Real Estate. The company also recently made
a notable acquisition by again partnering with Trinity to acquire a majority
stake in the Hyatt Regency Greenwich in Connecticut from Trinity.

Hecht
admits it would be easier with more buyers in the market, but he said Certares
will keep being opportunistic until then.

“You
will probably need one or two interest rate cuts — and I think they’re coming —
until you get more folks off the sidelines. That’s what it’s going to take,” he
said. “But while folks have been off the sidelines, we’ve been
opportunistically buying.”

Nolan Hecht’s Certares recently sold the East Miami in Florida and acquired the Hyatt Regency Greenwich in Connecticut.

Hecht
said hotel investment is in a period where the REITs haven’t really been buying
assets and foreign capital isn’t coming to the U.S. So, that really leaves
private equity and high-net-worth individuals or offices as the main players.
Plus, the bid-ask spread is still a problem.

“There’s
been a bit of a disconnect in terms of what sellers are willing to sell for and
what buyers are willing to buy for,” he said. “It probably was a 100 basis
points spread in the cap rate last year. It’s come down to more like 50 basis
points. So, we’re getting closer to a period that has more liquidity.”

Hecht
said in certain markets (like Florida), there are buyers, but in general, many
are taking a “wait-and-see” approach. But not Certares.

“We
are much more bullish,” he said. “We have a longer-term focus on the hotel
business, not what’s going on necessarily in a market today or tomorrow. We
love the supply/demand fundamentals right now in the U.S. and we play more on
in the upper scale [of hotels].”

Why
Certares is bullish

Hecht
said Certares’ bullish nature comes from the fundamentals it is seeing with
leisure and group numbers. But it’s also coming from the lack of new supply in markets
where it wants to acquire.

“We’re
seeing a pretty resilient upscale customer… We’re seeing strength on the demand
side, certainly leisure strength and certainly group strength,” he said. “This
is the best supply picture, or lack of supply, that I’ve seen in my 28 years in
the business. We focus on the urban cores and the central business districts
and coastal assets and resorts and there is nothing getting built. When you
parse it down, it’s less than 0.5% in supply in these urban markets, and
historically that’s been 2-2.5%.”

We’re seeing a pretty resilient upscale customer… We’re seeing strength on the demand side, certainly leisure strength and certainly group strength.

Nolan Hecht

That
kind of conviction had fueled several of Certares’ acquisitions in the past few
years in Boston, San Diego and Delray Beach, Florida, Hecht said.

“We
bought the Hilton Boston Back Bay, and there is not a single full-service hotel
under construction of any size in Boston right now,” he said. “Also, there’s
zero [new supply] in San Diego… In Delray Beach, you probably won’t see a new
hotel for a decade.”

Hecht
said he thinks the buying market is going to pick up in the second half of the
year, especially with the Fed expected to make a rate cut on Wednesday and
later in the year.

“The
catalyst is going to be these rate cuts and I think it’s more symbolic than
anything,” he said. “But it will also give buyers and sellers, especially
buyers and they’ll have essentially positive leverage on day one… That will
start getting a lot more transaction activity. I expect it to pick up,
certainly in the first quarter of next year or towards the last quarter of this
year.”

Certares
has acquired 16 hotels since 2021, but the company has looked at a lot more,
Hecht said.

“In
my career, supply is always the killer for the hotel industry, and we’re
terrible about it. Anytime things get good, we start overbuilding,” he said.
“The barrier to building right now is really strong. Right now, the cost to
rebuild a hotel is 30-50% from where it was pre-pandemic and the banks have
zero appetite for hotel construction lending. They’ll give you a loan for an
acquisition. They’ll give you a loan for neutral financing, but there is no
demand for construction financing. When you put that together, you really have
a muted pipeline.”

State
of leisure

Leisure
travel is here to stay, Hecht said, as people are prioritizing travel and
experiences over things like home improvement.

“COVID
may have been the catalyst to that… and we’re really not seeing a slowdown,” he
said, noting that any leisure slowdown is coming from Canadians not coming to
the U.S., but even that will eventually lessen, he said.

“We’re
bullish on leisure. We’ll certainly be bullish on the group. We’re seeing
increased attendance at all the major convention centers,” he said. “In
general, we’re seeing pretty positive trends.”

Certares
and Hecht love to find “pocket” neighborhoods in markets that have multiple
demand drivers because they can perform best even in a soft market. He
mentioned recent deals in Boston and New Orleans as being representative of
that opportunistic spirit.

The catalyst is going to be these rate cuts and I think it’s more symbolic than anything. But it will also give buyers and sellers, especially buyers and they’ll have essentially positive leverage on day one… That will start getting a lot more transaction activity.

Nolan Hecht

“We’re
seeing really opportunistic opportunities to buy things. Some of them are
assets that are overleveraged. We’re taking advantage of owners that need to
sell because their debt is either too high or too expensive,” he said. “Both
Boston and New Orleans are examples of assets in great locations with great
flags that needed to be renovated.”

As
for the new “pockets” Hecht said Certares is interested in, he started with
Florida and then continued to head north.