Great long-term outlook + short-term bumps = hungry investors

Great long-term outlook + short-term bumps = hungry investors

2022-07-13T07:18:47-04:00July 26th, 2021|Nashville, Tourism & Hospitality|

Writer: Joey Garrand

2 min read June 2021 — Nashville, the international travel destination, is known for its music scene, bachelorette parties and sporting events, among a variety of other festivities that bring business to the local hospitality sector. While the long-term outlook for hospitality in the Music City is rosy, local business leaders in the sector are currently grappling with the challenges facing their industry as they try to recover from the disruption caused by the pandemic. Investors see these challenges as opportunities.

Jai Patel, managing principal & CEO of Vivid Capital, explained to Invest: the primary challenges facing hotels at this moment. “Given the circumstances of the last 18 months, hotel balance sheets are quite levered, and this asset class could face some tough tests as we enter the 3rd and 4th quarters of 2021, which typically comprise a less concentrated mix of leisure demand. Moreover, the recovery of mid-week corporate travel has been slow, and I think that will continue to be a challenge in the near term.”

Larry Mullins, owner and partner of tax services at Mullins Clemmons & Mayes PLLC, echoed these sentiments in his interview with Invest:. “Most of our clients are doing much better as well. The only industry clients that are not doing as well are those in the hospitality and hotel industries, but our restaurants have picked up a lot this year, especially in the past two months, although hotels are still down,” Mullins said.  

Despite these challenges, the long-term outlook for Nashville is promising, and the robust supply of new hotels represents this. “On the private development side — if you look at the commercial boom — a lot of that is, surprisingly, hotels to handle the forecasted convention and hospitality demands as a result of so many people wanting to visit and hold business conferences in Nashville. Investors know there will be a return, and they want to invest in Nashville for the long game,” stated Al Pramuk, chairman & CEO of Gresham Smith, to Invest:.

Even with this investor interest, there have been various obstacles in realizing distressed hotel opportunities. “With such high investor interest in the hotel space, in general, it’s been increasingly difficult to find a good deal. Hundreds of billions have been raised to target distressed real estate, much of which is focused on hotels, but very little of that has actually been deployed thus far. Funds were expecting steep discounts, much like the last recession; however, many are settling for just 5-10% below par, which has kept the valuations, on the whole, somewhat inflated on a cap rate basis,” Patel stated.

As Patel also explained, many of the distressed deals that should have come to market were avoided or postponed by government subsidies, lender forbearance or deferment programs and franchise fee deferrals.

Between a challenging latter half of the year and a robust pipeline of new hotels, Patel and others are raising capital in anticipation of distressed hotel opportunities, with Vivid Capital hoping to start acquiring assets at the turn of the year. For investors, there is no greater scenario than a fruitful future with hardships in the near term.

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