Nightly Know-How: David Sonnenblick and Elliot Eichner Talk Lodging Finance
By Matt Grossman February 5, 2019 9:00 amreprints
Ask Elliot Eichner and David Sonnenblick their favorite hotel and you won’t get a straight answer.
“I don’t know if I want to answer that,” Eichner told Commercial Observer. “There are so many great properties that we’ve financed.”
We didn’t mean favorite deal. We meant favorite place to stay. Sonnenblick, 60, a married father of three, and Eichner, 62, a married father of two, have financed hundreds of hotels while working at the Beverly Hills-based Sonnenblick-Eichner. But Eichner won’t touch it—it’s too close to asking him to choose his favorite child.
Sonnenblick is almost as evasive. Almost.
“There’s a little secret chalet in the hills of Tuscany,” said Sonnenblick. “I’m not going to say [the name] because I don’t want other people coming.”
Set to celebrate its 20th anniversary next year, Sonnenblick-Eichner is fairly modest in size (there are only seven people in total in its office, including a third partner, Patrick Brown). But the firm has been anything but modest when it comes to representing borrowers in the coast-to-coast markets for hotel capital.
A month into 2019, the duo is already at work finding takers for hundreds of millions of dollars in debt, and on some of the most desirable nightly lodgings in the country (they’re currently working on 15 deals, Eichner told CO). For the second time, for example, the pair has been hired to arrange a refinancing of the Post Ranch Inn, a one-of-a-kind clifftop destination overlooking the Pacific Ocean in Big Sur, Calif., that Eichner said has the highest average daily room rate in America. (Currently, at low season, starting rates are $875 per night.) In Hawaii, Sonnenblick and Eichner are navigating the big-ticket capital markets to find funding for a new Mandarin Oriental in Honolulu, said to be worth at least half a billion dollars. And though they do oceanfront well, cities and mountains are no problem either: Recently closed deals have included a $265 million financing on the J.W. Marriott in downtown Chicago and a $212 million construction loan with the St. Regis in Park City, Utah on the slopes of the Deer Valley ski resort.
But we’ll let the two New Yorkers-turned-Californians do the talking.
Commercial Observer: How did you two first meet?
David Sonnenblick: I was working with Sonnenblick-Goldman in New York, starting in 1982, and I moved out to California in 1986. One of our senior partners in New York knew Elliot Eichner—that was Jack Schafer, who’s kind of an icon in the hospitality sector. Unfortunately, he has passed. But most people in the hospitality sector knew him. Jack eventually said, you should really meet this guy, Elliot Eichner—I think you’ll like him. It could be a great asset for you. I met Elliot, and as two New Yorkers, we kind of hit it off out here in California. So he came to work with Sonnenblick-Goldman in 1986, and we worked together until about 2000 as partners. We decided in 2000 to start our own firm, with the mantra that we wanted to be a boutique real estate investment banking firm, where clients know they have a senior partner personally handling their transactions.
David obviously had connections with real estate given the relationship to Sonnenblick-Goldman…
Elliot Eichner: Yes, his grandfather started it in the early 1900s, and David’s father Arthur and Uncle Jack ran the business. [It was sold to Cushman & Wakefield in 2007.]
How did you, Elliot, get into the business?
Eichner: My family was in real estate—my father managed properties. It was always in my family. But I didn’t want to get into managing property—I wanted to get into a higher echelon; I gravitated towards financing.
Are you any relation to Bruce Eichner?
Eichner: No. It’s a funny story: Many years ago, I lived at 15 East 36th Street and he lived at 11 East 36th Street. I would always get his mail.
Have you ever done a deal with him?
Eichner: Sure. He’s active.
Why did you guys decide to strike out on your own and not just stay with Sonnenblick-Goldman?
Eichner: It was a very amicable split—we just decided that we were at the point where it was better for us to go out on our own. We were originating deals, and someone else was placing the loans. And our premise was…if you go with us, you get all of us.
How do you describe your niche to prospective clients?
Sonnenblick: We won’t do a hundred deals a year. If we do 15 or 20, that’s a good year, because we work on larger transactions.
Was there a precedent at the time for a small debt brokerage focused on lodging?
Eichner: David mentioned Jack Schafer—back in the 1970s and 1980s, [Schafer] was the only person who was focused on this. So we cut our teeth hanging around Jack, and watching him. Now, obviously, [the market has] morphed, and everybody’s out there and trying to do it. But it really is still a specialty: getting into the numbers and operations on a very granular level. Yes, you can go out and source financing, but [it’s important] to really understand the business.
Do you get down in the weeds and examine the nitty gritty of how a hotel is run before you enter a deal?
Eichner: Absolutely. We understand hotels and we look at every line item. If we see one-time costs, we take it off to maximize the [net operating income]. We go through every detail and ask, why is this the case? We don’t just take the owner’s numbers.
What makes some hotels successful?
Eichner: I guess it’s position in the market. Management is important and operating the hotel is really important. But it comes back to position in the market.
What’s on your plate right now?
Eichner: On the upper end, we’re working on the development of a Mandarin Oriental hotel and residences in Honolulu, and on the smaller end, we’ve got any number of $20 million or $30 million deals scattered all over the place.
Is getting funding for a brand-name resort in Hawaii pretty straightforward? It seems like the appeal to travelers is built in.
Eichner: I think [every deal is] a little bit different. The ones that are up and existing with cash flow are a different animal than a development deal. Development deals, historically, have been difficult. Construction financing for large deals is not the easiest thing to do, because typically banks cap out at a certain amount. Then we have to go out and gather a consortium of banks to round out the capital stack. Given the size of these deals, construction financing doesn’t take you very high up—maybe to [a loan-to-cost ratio] between 50 and 60 percent. When you’re taking a look at the Mandarin Oriental, you start doing the math, and you need a lot of equity. A lot of times, we are tasked with going out and finding preferred equity, mezzanine debt or something to fill the capital stack. It’s usually a very long endeavor, and you have to put all the pieces together. And even on smaller construction loans, in the $30-million to $50-million range, there’s always a lot more scrutiny around construction, and a lot more elements to arranging construction.
What does it take for a developer to get debt in this sector these days? What are lenders looking for?
Sonnenblick: Hospitality fills different niches. You may have a downtown urban hotel and that will be underwritten one way. You may have an extended-stay hotel in a tertiary market that will get underwritten in another way. You’ll have these destination luxury resorts that you mentioned, like the St. Regis we did in Deer Valley, Utah, and another down in Orange County…deals don’t get built unless they satisfy a demand driver within a specific locale. Take the St. Regis—which we’ve actually refinanced a couple of times. That deal filled a void in that market in Deer Valley: a wonderful site on the mountain, ski in and ski out at the Deer Valley ski area. There was a big demand for that.
How do developers and lenders go about forecasting demand?
Sonnenblick: It’s like any other sector. In the office sector, you can determine demand by seeing vacancies and rental rates. In hospitality, if your occupancy in hotels is increasing within a market, and average daily rates are increasing, and there’s a pent-up demand for hotel space, you can argue that there’s a demand for new hotels to be built. People deciding whether or not to build a new hotel will go through that calculus.
Have hotel owners seen any benefits from the growing range of commercial real estate lenders in the market?
Eichner: I think the answer is, yes. When there’s more liquidity, it becomes more competitive. We see that across the board, even on construction loans—we go out and often find multiple lenders who are interested. There are a lot more lenders today. Historically, there were just a handful of life insurance companies, even CMBS wasn’t around back in the day, and there were also only a handful of floating-rate lenders. Today, there are a lot more lenders and a lot more people interested in the space. Some people have a bigger appetite for hotels than others, but we do find there’s a lot more lenders interested in hospitality.
Has the current business cycle proven anything about what concepts work for hotel developers and what don’t?
Sonnenblick: I think there’s been a huge paradigm shift to product-type hospitality. Back in the 1970s and 1980s, you went for your brand. If you were a Hyatt guy, you stayed at a Hyatt. If you were a Marriott guy, you stayed at a Marriott. Now, to the millennials, it’s not that important. It’s all about experience. Independent-brand hotels that are delivering experience at a good price point have really taken over the industry, and these big hoteliers now have to create experiences for millennials. They can easily go to an online travel agency and [compare their options across brands]. They don’t want brand loyalty; they want something that’s unique: a good restaurant, or a good vibe. They want common areas. You’re seeing all these independent-brand hotels with tremendous market penetration. Intercontinental bought Kimpton not too long ago because they have a big penetration in that market now; they had this independent-brand experience. The whole dynamic is very quickly changing: having to deliver that experience to the new customer. Millennials are such a big part of our economy now, and they’re not brand loyal.
Eichner: I think that’s a great point. Just like Intercontinental bought Kimpton, Hyatt just bought Two Roads [Hospitality] to get into that space, just as Two Roads had gobbled up Joie de Vivre [Hotels], so now they’re in the boutique space. And Marriott, now with the Starwood combination, they have 23 brands, but look what they’re doing with [their] Edition and Moxy brands. I don’t know if you’ve been in a Moxy hotel, but you walk in there and you have no idea you’re in a Marriott. The whole thing goes back to how, when we started in this business, there was Marriott and Hilton, for the most part, and if you were in New York, they were on the avenues. There was nothing on the side streets. Today, this whole business has been cut up, and it keeps getting cut up. Now, Hilton has Motto, a brand for micro-hotels. It’s almost like every week there’s another concept or another brand.
If branding is less important than ever, what are owners doing to differentiate themselves?
Eichner: We do a lot of luxury boutique financing. We do a lot of branded stuff, but independent hotels have been sort of a mainstay for us. One client [Provenance Hotels] has a lot of artwork. One property [Hotel Lucia in Portland, Ore.] is themed around presidential artwork, and he has a famous photographer, David Kennerly, who took photos of all the presidents, and the hotel has a lot of that artwork. Then you’ve got a hotel in Seattle [Hotel Max] where all the doors have street scenes of Seattle on one floor and another floor where all the doors have performers associated with Seattle, like Jimi Hendrix. So I think it’s about making the hotels interesting—that’s what draws people. Of course, there are still some of us who want to stay in a Hyatt or whatever to get the [loyalty] points, and even some of these other independent brands are establishing that sort of point system.
There’s the old saw that hotels are a leading indicator for commercial real estate. Is that still true, or does it need any refinement?
Sonnenblick: Hotels are indeed very sensitive to changes in the economy. When we go into a recessionary time, business travelers may not be traveling as much or staying at the high-end product. As you go into more of an active economic time, you may see more of these high-end urban hotels responding more quickly to it. But there are variations. After 9/11, people weren’t traveling internationally as much for vacation, so domestic resorts were seeing a little bit of a pop as we came out of that, as people wanted to stay closer to home. But from 30,000 feet, yes, hotels are a great indication for where the economy is going.
Eichner: The biggest proof of that is called a Pace Report, which has all the definites and [reservations] that hoteliers have on their books. In the past, you could look out six, nine, or even 12 months. Today, it goes out only 90 days, because these days, nobody books that far out.
What’s the role of securitized debt in funding the sector?
Eichner: Typically, in conduit CMBS pools, maybe up to 15 percent, maybe 20 percent, will be allocated for hotels. Hotels are sort of at the bottom rung. Well, now, retail is at the bottom rung, and they’re trying to put more hotels in. So in terms of capacity for CMBS lenders, that’s helped us, because there’s more financing available for us. The other big provider of fixed-rate debt is life insurance companies, which are a lot more conservative. They pick their spots a bit more, whereas CMBS is a much bigger pipeline, and they’ll look at deals that don’t really fit for life insurance companies. So it’s always been a big part of our business.
Has the market slowed at all recently?
Eichner: Coming out of the chute here in 2019, we are extremely busy. We’ve got a lot of deals we’re working on. We’re seeing a lot of liquidity in the market, but even given the volatility, no one has said to us, “We’re not in the market making hotel loans anymore.” Everybody who’s a lender in the space is making loans. We think rates are still very low, and Treasurys and swaps have come down. The credit spread has widened a little bit, but we think coupons are in the mid-4s to the low-5s for a fixed-rate deal. The cost of capital is still relatively inexpensive, we think, when you take a look at it. We already talked about construction, but we’re also helping people with acquisition financing. We’re doing some mezzanine financing for to-be-built hotels, we’re doing some floating-rate interim loans, and we’re doing some loans for existing hotels [that developers] are adding onto. In our office right now, we have a very broad spectrum of different capital requirements.
So the end of last year didn’t leave a bad taste in anyone’s mouth?
Sonnenblick: There was a lot of volatility in the stock market at the end of 2018, but the stock market is very reactive. People were taking their chips off the table with the whole China thing, and what the [Federal Reserve] was trying to do created tremendous uncertainty. I don’t think on the long-term horizon those necessarily affect what the outcome is going to be for real estate. The Fed now has indicated it’s going to ease a bit, so we feel good about that. The economy may slow, and maybe we’re coming to the end of our cycle, but we don’t see any shortage of capital for good-quality hotel projects. We’re seeing very competitive bids. People forget that in 2005 and 2006 when we thought we were pigs in clover, the cost of long-term fixed-rate capital was like, 5.25 percent! Here we are almost 15 years later, and we still have a cheaper rate for capital than at what we thought were the best times in the market, right before the recession happened. Plus, there’s always a big allocation for real estate from the institutional lenders: it’s never gone away. As a result of that, we feel pretty good that 2019 will be a very solid year.
With additional reporting by Max Gross