Chicago hotel owners are holding out for a post-COVID comeback

“At the start of the pandemic there was just a lot more uncertainty than we have now. We’re at the point now where we can see the light at the end of the tunnel,” he says. “I think there’s a general perception that banks just punt on this stuff. And they don’t.”

Even if weary lenders eventually enact a financial reckoning on bad loans, discounts may not be as drastic because of the deep pool of buyers. Private real estate funds targeting opportunistic and distressed assets were sitting on nearly $125 billion ready to be deployed at the end of December, 50 percent more than the dry powder available at the end of 2010 coming out of the financial crisis, according to financial data tracker Preqin.

Those buyers and potential sellers agree travel will come back with a vengeance, but they’re not on the same page as to when or how bad their losses would be in the interim. That’s leaving a sizable gap between what either thinks hotels are worth today, says Jim Costello, senior vice president at RCA.

“If I’m an owner knowing that six months from now we may be back to normal . . . unless I’m forced to, I don’t want to throw the keys at the lender,” he says, noting that after the previous downturn, “there was no signal that there was hope on the horizon.”

Some types of hotels are more likely than others to eventually trade at big discounts, says Bart Johnson, who leads the commercial real estate group of Rosemont-based lender Wintrust Financial. Leisure demand, for example, is expected to bounce back much sooner than business travel. That props up values of hotels that don’t rely on group business: RCA’s price index for limited-service hotels rose by more than 7 percent in 2020 while the index for full-service properties fell by 14 percent.

“Three years ago, if someone asked would you rather have a hotel located in the heart of the West Loop or a property off of (the interstate) in Bloomington, Ill., people would take the urban asset all day,” Johnson says. “But in today’s market, those (downtown hotels) are the assets that are suffering the most.”

Buyers may also find their way into potentially lucrative hotel deals without waiting for banks to seize and shop them. By providing fresh equity to hotel owners trying to tread water, investors may get the first proceeds from the hotel’s operations once demand comes back.

In November, Chicago-based developer Akara Partners kept a stake in its 206-room Home2 Suites in River North by recapitalizing the property with an undisclosed investment from Harrisburg, Pa.-based Hersha Hospitality Management, according to sources familiar with the deal. Hersha assumed a $57 million loan Akara took out on the property a year earlier.