A Return to Luxury

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In a recent Week in Review, I reported that UBS would be offering single-asset CMBS on the famous Fontainebleau Hotel in Miami Beach. This is a significant move for the bank, and for the commercial real estate world, because it is the first time in over 10 years that a hotel property has been securitized as a single asset (rather than being packaged with other properties, to spread out the risk for buyers). I bring up the Fontainebleau once more because it offers a positive sign for CMBS demand, not to mention investor confidence in the expensive, often-risky niche of luxury hotel properties.

(Admittedly, I also wanted to gawk once more at a hotel that’s well beyond my price range.)  

Fox Business reports,

Such large loans are often broken out into their own CMBS because the borrower typically has more equity than most loans, and may be able to get lower rates, analysts said. Along with $168 million of mezzanine debt, the total lending on the Fontainebleau accounts for 52.7% of the property’s value, according [to] a term sheet.

With a single asset, the borrower is able to procure debt more affordably, so the move makes sense. But like I said, this also signals new optimism in a city that was especially hard hit by the ’08 financial crisis. Granted, Miami Beach is a hugely popular tourist destination, and the 1,594-room Fontainebleau one of its most recognizable landmarks, associated with everyone from Elvis to Sinatra to James Bond. Co-owned by Dubai sovereign wealth fund Istithmar and the Florida-based Soffer family, the Fontaineleau is a particularly prestigious property.

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But as the 5-year bonds are issued for the hotel, I wonder if this property’s $412 million offering can be considered a true sign of resurgence for the delicate high-end hospitality business.

As usual, I think the answer to this question will vary by region, by country, and perhaps even by property. Here are some news items related to luxury hotel occupancy in various parts of the world:

  • In Hawaii, as of last fall, luxury hotels were leading the recovery among the islands’ badly hit hospitality sector.
  • Dubai, another international tourist hub, has also seen a recent resurgence in its hotel occupancy. Its luxury hotels were particularly battered by the global financial crisis.
  • In Asia, the brand-new Sands Cotai resort opened in Macau, offering a bump to the related gaming industry.
  • And in Europe and the UK, Marketwatch reports that luxury hotels are heating up once more.

Thus, we have some clearly positive signs from these select markets, but for some secondary or smaller markets, luxury still might be too risky an investment. As I pointed out a while back, certain hotel properties catering to the exceptionally wealthy will remain viable merely because their target market is often buffered from macroeconomic fluctuations. In other cases, however, it may well be true that a budget-friendly Holiday Inn or Ramada, accessible to a much wider demographic, is a wiser (and more profitable) investment.

 #CRE #finance #hospitality