CBRE’s Mark Owens Talks Hotels and Hawaii

Owens: I grew up in a little town called Kailua Beach, which is a suburb of Honolulu. It’s on the island of Oahu.

What was it like growing up in Hawaii?

Growing up there you don’t really realize how amazing it is because everyday is beautiful, so you can go play tennis or go in the water or go hiking. Even in high school and junior high, all of our P.E. classes were outside. It was pretty cool.

I lived there through high school and went to Cornell School of Hotel Administration. I wanted to be an architect when I was little, but I wasn’t so gifted in that respect. One of my uncles was a developer, and he kind of opened my eyes to development, and I loved hotels. He said, “You know, there is a school that does hotel real estate, so you should keep an eye on it.”

How did you know you liked hotels?

We traveled a lot. I’d sneak out of my hotel room whenever my parents were asleep and just explore. My family is not in the business, and at Cornell if [your family is] not really in the hotel business, they really want to make sure you know what you’re getting into. I actually did an internship in high school where I worked at the Hyatt Regency Waikiki. I’d go there every day after school.

What did you do during that internship?

Hyatt has a very good and well-known management internship program, which is for people who have already graduated from college. They put me alongside a lot of those teammates in that hotel. It’s a huge hotel, about 2,200 rooms. We had a bunch of Hyatt trainees, and I got to go around with them. Every three to four weeks I’d be put into a different department, so I’d spend almost a month in the front office, and then housekeeping and security, and food and beverage. It was really neat. It proved that I loved the hotel business, but it also proved that I was not necessarily super gifted at handling guests.

It’s interesting because you get to see all the ins and outs of how a hotel works, which is really helpful for how we do our job. I was passionate about the building more than running it. The cool thing about the Hyatt is that it’s a true mixed-use building. You basically have a shopping mall on the first three floors, and it’s right on Waikiki Beach, so it’s totally irreplaceable. It’s on a ground lease, so you have a weird, funky component there. And it’s just this massive operation.

After Cornell, you went into consulting, correct?

Yes. Actually, at Cornell I was lucky enough to do the Management Internship Program, similar to the Hyatt program. It was basically a six-month internship with a company called HVS on Long Island, which was founded by Steve Rushmore. He was still very active in the business, and I was really lucky that I got to do a lot with him and his team directly and really learn the consulting side as an undergrad. I got to work on a bunch of different things, from feasibility studies and appraisals to working with Hilton in Japan, which was pretty cool.

Did you end up working there after you graduated?

I did. I worked for a brief stint at Tishman Hotel Corporation, right after graduation [in 2000]. Between that, the market slowing down and lack of big projects, I realized that in order to learn as much as I could as quickly as I could—and Steve Rushmore, being who he is, is very generous with his time—so I called him, and I asked if I could come back. I liked what I was doing at Tishman, but we just weren’t doing a whole lot. At that time, Tishman was building the Westin on 42nd Street, and I worked with Tim Haskin who was running the investment banking side of the firm, which was really cool, but I wanted more exposure to more markets. So I [worked at HVS] for about two-and-half years and was hired by Mark Gordon at Sonnenblick-Goldman to basically do what I’ve been doing for the last 13, 14 years. I knew what I wanted, and that, I think, helped.

That was the other really neat thing about growing up in Hawaii, and also probably a little bit dorky—watching the Asian bubble and how it impacted the development side and seeing how the hotel business was impacted by the burst in the Asian economies so by the time I was in school and on the consulting side, I was finally able to understand all the parallels, which helped because I had at least seen cycles before, where [mainland] America was a bit more insulated.

How did the opportunity at CBRE come up?

About two-and-a-half years ago, one of my friends, Brad Burwell [a vice president at CBRE Hotels], would always keep in touch and say I should speak to people at [CBRE]. I had a really great team and a great ability to run my own business at Ackman-Ziff, but I liked what I was doing, and I had autonomy and didn’t really have the desire to move. Finally, one day I agreed to meet Kevin Mallory who is the global head of hospitality [at CBRE]. We had a very nice meeting, and I thanked him for his time but said I didn’t want to move. They were very persistent, and about a year before I joined, I met Chris Ludeman, the global president of capital markets, and Brian Stoffers, the global president of debt and structured finance. It was just an amazing group of people. The personalities were so great and you could tell that the connectivity of the firm was so huge that it was one of those moments where you think, okay, you might be comfortable, interested and doing fine, but how many times do you have the ability to take a [big] step? They were incredibly gracious and consistent in following up, and I think I met with all of them maybe four to six more times, and every time it just got better and better.

What does your role at CBRE entail?

[I joined to] build out the hotel debt and structured finance platform because there are not that many people with our skill set in the business—and hotels are more challenging, generally. I’d say right now it’s a more challenging market, and it’s a more inefficient market because of the lender side as well as from the client side. Hoteliers are very good at looking at the hotel business as opposed to the real estate. They’re also very good at the finance of the hotel but not structured finance. There’s a comfort with calling your former lender; and I think a lot of our clients—until they actually use our services—don’t realize how we can help their overall process. Most of the time our clients are amazed at the terms that they get—so not just proceeds and pricing but also how we’re able to basically get the best structures that are available in the market too. It’s kind of fun because it’s figuring out what the market will bear but also helping our clients, really as an extension of their finance team, get the best financing out there.

What else makes the market inefficient or challenging right now?

It’s always been challenging; the hotel business is just challenging to begin with. From a market standpoint, I think the biggest misconception among hoteliers is the availability of capital. I find that a lot. A lot of our clients when I’m giving them feedback on what the debt markets are doing or how to structure their transactions, they look at me like I’m crazy because they don’t think we can get them the terms we say are available. That’s one component of inefficiency, the knowledge of the borrowers that’s still associated with the beginning of the year, where there were fewer capital sources.

The other component of inefficiency comes just from the market constantly moving. Even though the market was tricky at the beginning of the year because the commercial mortgage-backed securities market stalled, there were still a lot of other buckets of capital; it was just knowing how to access them and where they were. Now that the commercial mortgage-backed securities market is back in business, there is just inherently more competition. Even though most of our clients are institutional in nature, they tend to float because they want the flexibility of being able to sell out of it without paying anything. The fact that there is now more appetite on balance sheets, whether it’s traditional or debt funds or overseas capital, has just helped compress the market. One of the things we see in each of our processes is that groups that are the most competitive right now, for example on a current deal we’re running, were not the most competitive groups two or three weeks ago.

Are you seeing more layers of capital when it comes to construction deals?

It’s evolved within the last two to three months. If you were to ask me that question in April or May, I would have said we would definitely need to bring in separate lenders to accommodate an aggressively leveraged hotel. Around the beginning of May and June, the number of lenders willing to do the whole stack again came back pretty aggressively. A good example is we were closing on a Sheraton in Salt Lake City, and in that deal we were basically expecting to close with a senior and a mezzanine position. By the time we got to our final round of term negotiations, we ended up with several lenders who could do the whole stack and were equally priced if not more aggressively priced than pairing two different solutions. That’s been the case since, for the most part.

Is there any particular type of financing that you’re seeing a lot of demand for now?

I’d say the difference between right now and maybe nine to 12 months ago [is that] if there’s any disparity in what the seller’s bid is versus the market’s, they don’t need to sell. Most of our owners aren’t in a position where they need to transact, so if they aren’t going to get the pricing they want, the debt markets are so aggressive that they can probably just refinance or they may already have attractive financing in place so they don’t need to pull the trigger. So what I’m seeing from my seat is a bit more refinancing activity than acquisition activity.

Are you seeing any demand for construction loans?

We’re seeing a lot of people who want construction, but because of the complexities of it, we’re helping educate clients on their underwriting because a lot of times between the underwriting necessary for these hotel construction deals and what’s actually available, there’s a little bit of a misfit, meaning leverage levels are lower from banks. Or if our client is really wanting to push leverage, the cost of capital for that construction debt is much more expensive.

Basel III kicked in which changed the way that banks can hold paper, as well as the markups that used to be available for land appreciation, so that’s fundamentally changed a lot of the economics of building, especially if I’ve owned a parcel for 10 years and it’s quadrupled in value, I can’t capture any of that to finance it. That is something that’s created challenges for some our clients. The benefit is that it’s curtailed a lot of development. We all read that there’s massive amounts of supply coming into the market—which is overblown in a lot of cases because of the lack of supply being developed over the last 10 years—but we’re still below the amount of [new supply] that would have otherwise been delivered during a normal period.

How is that reflected in the numbers, like average daily rate (ADR) and revenue per available room (revPAR)?

It’s totally market-specific. Even in Manhattan, it’s submarket and asset-class specific, meaning service level. New York City has some relative softness in revPAR, but you look at the amount of office space coming online and a lot of it is in markets that have historically not had a lot of supply. The last submarket to see a massive expansion has really been that 34th to 42nd Street corridor. There’s not really that much office stock in that area—it’s more north or east. Those hotel developers were pioneering in that area, but what’s going to be really interesting is that those are going to be the newest and closest hotels to Midtown West and Hudson Yards, so the demand dynamics are totally different in two to three years than where they are today.

Is there any hotel market in New York that has surprised you with its performance?

I think what’s really interesting is that Brooklyn has truly become its own market, whereas three or four years ago it did have its own demand base, but it was still drawing on a lot of Manhattan business. That has shifted pretty dramatically.

How has Airbnb affected your clients’ business?

I think Airbnb is inducing a traveler that may have not traveled before, because it generally falls within a different price point. What we have seen is that it impacts the peaks. If I were a hotel owner, the night that I live for is the night that New York City is sold out, and you have to be in New York tomorrow, and you have to pay $900 for the smallest room in my hotel. That’s my highest margin business. What we’ve seen is Airbnb, in high-demand periods, with the ability to push rates. So now, I may only be able to charge you $700 per night. It also works to the opposite respect in that Airbnb is supply that opens up and then closes off. When people quote there’s however many thousand of Airbnb units in this city, they’re not always on, and they’re not always active, so it’s kind of misleading. But it’s a growing market, and they have been tapping into the corporate market.