Opportunities for management companies to add properties to their portfolios are excellent for 2010. But not in traditional ways.
There have been many investment conferences and roundtables.
Several things are clear:
- There are trillions of dollars in commercial real estate that is not covering debt service.
- The government is not going to let the financial institutions carry these assets at a loss for long.
- Financial institutions will be forced to take many of these assets back. At that time they have the choice of writing them down, or finding management companies to operate them until the real estate markets stabilize and the assets can be sold at a profit. According to the experts that’s several years down the road. The experts also agree financial institutions can’t write these assets down enough to unload them without getting into financial difficulties.
This spells opportunities for solid operators to pick up management contracts that will likely be multi-year contracts. This is different than previous recessions. In prior recessions financial institutions have taken back properties and sold them quickly. Management companies would get fees for only a few months. Many times the management contracts on these distressed assets didn’t provide a ROI for management companies.
This time around, with shrewd negotiating, management companies will be able to make money on the management contracts; get first right of refusal on acquiring the hotels, and; in some instances can probably just take over debt service on the hotels, assuming the management companies can identify ways to increase business to at least cover expenses. Operators who have ability to build asset values over a few years will assume much stronger leadership positions in our industry.
Management companies can also start to act as Asset Managers on select hospitality assets. The best opportunities will be on assets held by small financial institutions who don’t have the Asset Management depth to properly evaluate hospitality assets.
Financial institutions will need consulting expertise in marketing and operations. Many assets taken back may best be operated by splitting out the F&B from the rooms. Or totally repositioning the asset.
One of our clients recently took over the F&B operations at a nice hotel close to their corporate offices and reasonably close to another hotel they operate. An ideal contract? On the surface no, in actuality yes. This deal makes sense given the location in relation to other operations the company is already managing.
2010 will be year of excellent opportunities for companies to expand their portfolios…if they concentrate on assets close to home. This is wonderful market to build new relationships. A few management companies are already taking advantage of these opportunities. It will be interesting to see how many companies use 2010 to expand their portfolio from 20-100%.
