In an industry where the financial climate is constantly changing, owners rely on the expertise of Insignia/ESG Hotel Partners to structure.
With profits at near record levels, these are good times for the hotel industry. However, owners looking to finance projects are faced with a strict lending environment and other challenges. To overcome those difficulties, owners often need the expertise of someone experienced in the art of the deal.
Atlanta-based Insiginia/ESG Hotel Partners, a division of New York-based Insignia/ESG Inc., certainly qualifies as having expertise in hotel deals. With its 12 offices, 29and nine analysts, the company arranged just under $1 billion in hotel transactions last year. In its 11th year, the company is one of the largest hotel brokerage firms in the world.
What sets it apart from many of its peers? Lewis C. Miller, senior managing director for Insignia/ESG Hotel Partners, says the company's market knowledge is the determining factor. In today's hotel climate, he says wide-ranging expertise is more important than ever.
"The industry is always in a constant state of change," Miller explains. "The need for seasoned real estate transaction specialists is very important."
Hotel Partners was founded in 1990 by Paul Jones, who now is international executive managing director in the company's London office, and Bill Gudenau, who is executive director in the Chicago office.
"Hotel Partners' timing was excellent in the industry," says Miller. "There was not a national brokerage firm. There were great firms on a regional basis, but there was really no one national brokerage firm in the hospitality industry. Hotel Partners seized that opportunity."
When Insignia acquired Hotel Partners in 1998, the company gained access to additional resources, including Insignia's Capital Advisory Group, which in 1999 brokered approximately $4 billion in transactions. Miller joined the company over a year ago, following a six-year stint at Atlanta-based Bass Hotels and Resorts, where he headed up hotel development in the Americas. Prior to that, he served three years as chief financial officer for Atlanta-based Jacoby Development.
REITs come and go Five years ago, REITs were the dominant players in the industry. It was an excellent time for transaction specialists, because REITs lacked the necessary local market knowledge and needed the expertise of brokers such as Hotel Partners.
"We really had an incredible growth spurt in hotel acquisitions and transactions. That was really fueled by the appetite of REITs," says Miller. "Size was important to REITs. They needed critical mass. In order to get that critical mass, they needed a transaction intermediary."
REITs quickly satisfied their appetites by packing their portfolios with hotel properties. Later, REITs reevaluated their acquisitions and paring down their portfolios. This change was brought about because the REITs "recognized that a publicly traded vehicle is an inefficient vehicle for holding real estate," says Miller. "Being an inefficient vehicle, the equity markets do not give full credit for the market values of real estate as stock is traded on the stock exchange."
With REITs looking to unload their hotel assets or reorganize into private companies, the door is open for other investors to enter the game. "It's a phenomenal time right now. You have strong sellers - REITs - that have had well-maintained properties in their portfolios, but now are no longer considered core assets," he says. "Those are good investment opportunities for strong individual companies or hotel chains."
New challenges Although today's hotel industry provides plenty of opportunities for owners and developers, the increasingly conservative lending environment is hampering acquisitions and new development. For the past few years, lenders have been reluctant to provide loans due to concerns about overbuilding.
"Financing is extremely difficult," says Miller. "Certainly there are many of us who remember the time when we could finance hotel investments easily at 75% of cost or market value. Now the rule is 60%, and in some extreme situations it's 50%. So that puts a lot of pressure on investors for higher amounts of equity."
Despite the tight lending market, certain property types are ripe for development. The mid-priced hotel sector presents opportunities for both new developments and repositioning limited-service properties into full-service hotels, he says.
Mixed-use developments often catalyze or support the addition of a hotel project. "It helps with financing. Owners have the opportunity to better securitize their investments," says Miller.
The select resort market is exhibiting growth. Two of Insignia/ESG Hotel Partners' clients - Dallas-based Rosewood Hotels and Resorts and Minneapolis-based Regent International Hotels - are expanding into the high-end resort market by opening smaller-scale resort properties that can offer an easier launch, require less land and a smaller financial commitment.
"Unlike the properties that we saw developed in the 1980s in Hawaii - the mammoth 600- to 700-room projects - these companies really brand and market exclusivity, and exclusivity may not be a 600- to 700-room project, exclusivity might be a 75- or 150-room hotel," says Miller.
Full service Unlike brokers that specialize in specific property types, Insignia/ESG Hotel Partners provides transaction services for all segments of the industry, from limited-service to five-star properties. In addition to its experience in all property types, the company prides itself on hiring brokers with wide-ranging hotel real estate experience. "The brokers here at Insignia have been in different facets of the industry," says Miller. "The brokers at most other firms have been strictly in consulting roles or have always been brokers. A lot of the brokers in Hotel Partners have been developers, and they're experienced in acquisition, development and financing opportunities."
Hotel Partners also is able to market properties and advise clients on an international scale. With its network of brokers, the company can market each client's properties across the United States and overseas. To market projects globally, the company often uses a team approach, with brokers in different offices working together on transactions.
"Our clients have the ability to network with not only 29 brokers domestically, but also Europe. Your property will gain global exposure," says Miller. "You're working with brokers who have one-on-one relationships with investors and developers throughout the world, so you know your project is getting the best exposure."
Eye toward the future The company's long-term goal is to maintain and improve on its success. Miller says the company wants to continue managing a diverse transaction base while becoming more efficient and effective. "We want to be the best," he says. "The best is not necessarily the biggest, but we want to be the best specialists in terms of the transactions that we do, and be able to do better than our fair share of the market."
In an industry where fewer hotel companies have real estate development specialists, Miller expects there will be an increasing need for the company's services. "There are fewer and fewer bricks-and-mortar developers in the hotel chains," he says. "They no longer necessarily have the real estate specialist, as opposed to the flag or franchise specialist. So they need to rely more on outsourcing their real estate needs."
While the Internet will help to speed up transactions by providing market and due-diligence information, dot.com brokerage services will not eliminate the need for real-life brokers. "In order to have a successful transaction, there has to be a meeting of the minds. Computers can't determine if there is a willing buyer and a willing seller," he says. "You'll never lose that transaction specialist who has the personal relationship with the buyers and sellers."