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Flexible banks and additional federal coronavirus relief are delaying an expected gold rush of distressed hotels from going on the market. But that isn’t keeping opportunistic investors from swooping in.

Hotel investment group Bainbridge DXS and Torrey Pines Hotel Group this week launched a $500 million fund aimed at acquiring as many as 200 hotels around the world in the next 15 years. The investment fund comes just a few weeks after New York Yankees legend Alex Rodriguez announced his involvement in a $650 million fund targeting the acquisition and development of Hilton hotels over the next three years. Starwood Capital Group CEO Barry Sternlicht said last year he was “tickled to death” by the amount of distressed sale opportunities coming down the line.

But Washington may impact how much distress will ever materialize.

“If we didn’t have a vaccine on the horizon, you’d see a lot more properties transact,” said Steve Carvell, a professor at Cornell University’s School of Hotel Administration. “Now you’re seeing more people think they can kick the can down the road for a few more months.”

Investors and analysts for months have been waiting for distressed deals to hit the market and for new owners to swoop in. All the major hotel brands, from Marriott to Choice Hotels, predicted the trend would fuel their own growth during the pandemic.

New owners would look to take on a new brand affiliation — a transaction known as a conversion — during renovations and add to a brand portfolio at a time when banks shied away from new construction projects.

There have been occasional deals that have transacted during the crisis, but it hasn’t been the crashing wave of default and distress many expect. Banks offering continued forbearance terms on mortgages, Congress passing another round of Paycheck Protection Program small business loans, and optimism surrounding vaccine distribution combine to give some owners enough motivation to stick out the storm.

Banks simply don’t want to take on ownership of hotels when the industry as a whole is struggling, the thinking goes. But there is still the expectation some level of higher hotel transaction volume will inevitably occur.

“Eventually stuff has to flush out,” Carvell said. “I think that’s why these private equity firms are waiting.”

Why Wait?

Investors recognize opportunistic deals haven’t emerged as quickly as some originally forecasted, but they also think Congress and banks only have so much runway in terms of relief.

“People will hang on, but the patience is running out,” said Torrey Pines Hotel Group CEO Michael Slosser. “I think there will be more opportunities in the next six months because I don’t think the industry will begin to recover in a recognizable period until the fourth quarter of this year.”

Optimism surrounding the vaccine and federal coronavirus economic relief may be enough for a smaller, leisure-oriented hotel to survive. But bigger hotels in urban markets aimed at group and convention business will take the longest to rebound. That hotel market segment, with typically more than 400 rooms at a single property, will likely present the most opportunity, Slosser said.

The Bainbridge-Torrey Pines venture will focus on upscale and luxury hotels that need repositioning.

“We want to identify value-add plays in the hospitality space and find opportunities to come in and be a full-service investment and hospitality platform,” he added about the overall partnership.

The continued industry assistance, either directly from lenders or from the federal government, additionally staves off distressed sales because existing owners disagree with valuations floated by potential buyers.

But that pricing discrepancy will almost certainly narrow the more it becomes evident sustained levels of 70 to 80 percent occupancy rates are years away. A full industry recovery isn’t expected until 2024, according to STR.

“Now it becomes a question of who really wants to get rid of a hotel, and who wants to sell under these conditions,” Carvell said.

Photo Credit: A wave of distressed hotel sales have still yet to emerge for opportunistic investors. JanClaus / Pixabay