CHICAGO — With cash-flush buyers increasingly coming off the sidelines, hotels are increasingly trading hands, but the market remains extremely lumpy, according to a panel during Lodging Hospitality’s fourth annual Midwest Lodging Investors Summit at the Hyatt Regency McCormick Place.

There’s no shortage of bidders for large Class-A assets, the healthiest part of the market. And more distressed deals are taking place. But there’s a hole in the market. Deals in the $3 million to $15 million range are much more difficult to close.

The driving factor in deal activity is the debt side of the equation.

Bidders for large Class-A assets tend to be REITs and private funds —investors that either have lots of cash on hand or ample access to credit markets. These are also the kinds of opportunities that lenders of all types are willing to finance.

Distressed deals, especially for smaller assets that can be had for $3 million or less, are also getting done as all-cash deals. But deals in the $3 million to $15 million range are not happening largely because lenders are conservative in funding such deals, according to Teague Hunter, president of Atlanta-based Hunter Hotels.

“That’s where you need financing, and that’s where the slowness is,” Hunter said. “They can get done, but [lenders are only willing to offer] 50 percent to 60 percent leverage. And with that low level of leverage, buyers cannot hit (their return targets).”

Josh Loftus, vice president of originations at GE Capital agreed, saying it was tough for lenders to work in that range of loan sizes. “At end of the day, we’re going to want the top credits, and the CMBS market is going to go after those guys too. Any kind of turnaround story is tough for a lender to get done. And a 50 percent LTV just isn’t going to help the borrower’s return.”

Overall, approximately $8 billion in hotel deals have taken place so far this year, according to Mitch Miller, founder and CEO of the Miller Law Group.

Miller moderated the session entitled “REITville vs. Reality.” REITs acquiring upscale properties account for about half of those deals. And there have been 12 portfolio deals of $100 million or more completed this year.

Dan Beider, chairman and senior managing director with Paramount Lodging Advisors, says there has been an uptick in interest in deals across the board, and the activity from smaller buyers is sometimes getting overlooked.

“When we send something out to notify the investment community, in the last six months we have had a 400 percent increase in executed confidentiality agreements across the board,” Beider says. “Fundamentally, a good sound deal that is priced right is going to sell.”

Gazing into the crystal ball
Going forward, the panelists expect the hotel investment market to continue to recover and for deal volume to grow.

Buyers will have opportunities to add value to an asset and generate net operating income. “Those opportunities are everywhere,” Beider said.“They are on-market and off-market opportunities.”

Bill Hanley, president of Lexington Hotels, added, “REITs are going to top-performing markets … and to guaranteed locations occupied by the top four or five brands. That leaves a whole sector of the market where there is opportunity. The challenge is that the investor needs to understand that value, and where it’s performing at now will not be where it is going to be in three years.”