October 23, 2020

ilpuntontc

Just Do Travel

How a top South Beach hotel broker is still selling amid the pandemic

5 min read
  • The hotel sector has been one of the hardest hit since the onset of the coronavirus pandemic.
  • Susan Gale, a top broker in Florida’s South Beach, gave Business Insider a breakdown of what it’s been like selling hotels during the pandemic.
  • According to Gale, hotels can sell during these uncertain times if both sellers and buyers are willing to adjust to new market demands.
  • Visit Business Insider’s homepage for more stories.

“Just days before the shutdown, I had over $70 million under contract in hotels,” Susan Gale told Business Insider. “Every deal got canceled.”

“The market in Miami was unreal before the pandemic; 2019 was a record-breaking year for me and it looked like 2020 was going to be one of the best years in my 20-plus year career of selling hospitality assets,” she said, “but then everything shut down.”

Gale described the energy of the market during that time as “panicked.” Even so, she said, “No one realized the impact in March, and how devastating this was going to be for the hospitality sector.”

The founder of the the Susan Gale Group, she is a leading broker in South Florida with over 30 years of expertise and experience selling commercial real estate, with a specialty in hotels. She’s also the executive director of commercial and luxury specialty properties at ONE Sotheby’s International Realty.

Like most of the real estate sector, Gale said things in hotels were virtually frozen until June. However, Gale explained that as the reality of the situation started to sink in around the beginning of July, investors began moving past the initial shock of the new COVID-19 norm and phone calls began pouring back in.

“Shortly thereafter, people started circling and calling and asking if we had any great deals,” she said.

‘We have a lot of inventory’

In South Beach alone, Gale said, she has 16 properties on the market. “We have a lot of inventory, and I’ll tell you, there are buyers.” She said her current listings span from just under $6 million all the way up to $300 million. “Our average price point is somewhere around $20 million,” she said.

She said she currently has six deals in the works.

Prospective buyers are willing to wait, whereas “it’s emotional for the sellers” right now, she said, making it “really difficult to close commercial deals right now, unless it’s a steal.”

She said offers have been heavily discounted, sometimes as high as 30% to 50%, she said. “Everyone is discounting to some extent,” she said, relaying price cuts of 5%, 10%, and 20% as general benchmarks. 

Gale estimated around 70% of her business has been with foreigners: mainly from Italy, Mexico, France, and Argentina. And while Gale explained that there has always been a strong interest from foreign buyers, there’s been an increase due at least in part to buyers’ desire to get their money out of Europe and South America. 

“We have a very large private database,” Gale said. Because foreign buyers couldn’t travel to the US during the pandemic, she said they’ve been making offers based off “2019 numbers, sometimes going back to 2018 and 2017.”

Gale said there’s been movement among sellers over time, as they initially didn’t need to offer discounts and government aid made them more comfortable waiting. But as time went on, she said they began easing up.

Any hotel that’s priced realistically can sell, Gale said she believes.

Hospitality looks past 2021 for a recovery

Gale estimates that the sector’s correction phase will take about two to three years, and experts agree. 

Per a survey conducted by Jefferies this past summer, half of respondents in the US and Europe didn’t “feel happy” about booking vacations in 2021, meaning a hospitality recovery will likely come after that.

But it’s not just recreational travel taking a hit. Jefferies predicts that business travel will diminish far beyond 2021.

“Health, safety and sustainability concerns make business travel, broadly speaking, a thing of the past,” the report reads. Instead, it said virtual conferences will continue to grow in popularity, while airlines and hotels will see a dip. 

In 2019, around 30% of US travel spending was for business travel, which translates to $334.2 billion in spending and about 2.5 million jobs, Business Insider previously reported. Executives across the country told Business Insider that the pandemic has forced them to reevaluate business travel, and they have found that in-person meetings are often unnecessary.

There are only two ways to buy a hotel in this climate: all-cash offers or through owner financing

“There’s no funding from banks,” Gale said. “That will change probably right after the first quarter of the new year, but I could be wrong.”

Banks need to have a lot of security, she said, and that’s a problem with hotels’ average daily rates so low right now. In other words, banks are reluctant to finance hotel deals because of lower revenue generation prospects.

“ADRs are not even half of what they were,” Gale said citing the examples of Miami hotspots, like the Fontainebleau, as examples.

In fact, the going rates are so substantially lower than normal, a lot of boutique hotels are not even open in South Beach, she said. Owners and managers are waiting out the market, she continued. But operating a hotel at those low rates, or even closed, adds up. 

This reality is creating another incentive for some to sell — if they can get the right price, or if they see cash in hand.

“And don’t forget,” Gale continued. “There are still a lot of sellers, and I have a lot of them, who are not willing to give tremendous discounts. But they are willing to give some,” she added. “Especially if they see a buyer offering all cash.”

Lengthier negotiations

While she said she’s busy and still making deals, Gale explained that she deals with daily bumps in the road. 

“First of all, it’s hard to get the funds over here,” she said. “During the early pandemic we had offers, multiple offers, but banks were shut down, for example in Italy.”

Gale also said buyers with cold feet will come back after the inspection and ask for even bigger discounts. 

“Right at the end, right before we finish the inspection period, it’s very common right now for [prospective buyers] to ask to renegotiate,” she said.

With this in mind, Gale said she makes sure to leave room for negotiation when pricing. 

She said she anticipates that as we enter the fall months, more sellers will be open to discounting their properties, keeping the ball rolling on more deals.