Borrowing for Hotels in 2023 Will Be Possible but Pricey

Featured in Costar, Hotel News Now

By Sean McCracken

January 3, 2023

Fears that a wave of debt maturities, a recession and a risk-averse attitude leading to less lending to commercial real estate could sink the availability of financing for hotels are overblown, experts said, but hotel investors will have to grow more comfortable with the increasing cost of capital.

Speaking with Hotel News Now, PMZ Realty Capital President Peter Berk said there’s “no shortage of availability of debt financing” for hotels, and that is expected to remain the case through the year.

“The [commercial mortgage-backed securities] lenders are out there looking for deals; there’s just not a lot of people that want to pay the freight for that,” he said. “Those are fixed-rate loans. On the floating rate side, there’s also a lot of lenders, but those loans are priced anywhere from the 8% to 10% range, and people don’t want to pay that.”

Experts agreed that seems to be the overarching theme heading into 2023: Money is out there, but it’s expensive. And that’s expected to remain the case as the Federal Reserve continues its plans to push interest rates upwards.

Berk said there has been an “education process” working with borrowers to understand they won’t be able to get debt as cheaply as they have in recent memory, and that some of the rates they can get now are still OK to good from a historic perspective.

“They hear [debt is more expensive] from us, and they hear it from other people, but still in the back of their mind, they look at the last deal they did and think ‘Why can’t I get that?'” he said. “So there’s always a time passage that has to come down before they realize that 6% really isn’t a bad number. Historically, it’s an average-to-good number.”

Scott Melby, vice president of capital markets for Driftwood Capital, a hotel ownership company that also has its own lending platform, said it’s reasonable to expect interest rate increases to continue at least through the third quarter of 2023 — although some are hopeful the Fed reverses course more quickly.

“Financings are getting done, and debt funds are making up the majority of that,” he said, adding his company is closing a deal at a 10% interest rate at a 65% loan to cost.

Melby said the availability of financing varies greatly based on the size of a project, which Driftwood is more comfortable with on the smaller side.

“That $10 million to $20 million mezz slug still seems to be a pretty active place in terms of what people are needing capital,” he said.

Mathew Crosswy, president of Stonehill Strategic Capital, said hoteliers shouldn’t expect a repeat of the Great Recession even if the broader economy heads into a recession.

“For the most part, underwriting fundamentals have been sound, so loans are doing pretty well,” he said. “And the hospitality industry has a lot of tailwinds. So good-performing loans should be finance-able. Banks will extend credit with existing borrowers.”

Donald Braun, president of Dallas-based lender Hall Structured Finance, said his firm continues to be “anxious and open to do a lot of new originations in 2023.”

“There’s not been any pullback for us,” he said. “Clearly every property sector has been impacted by the increase in interest rates, and hospitality is no different in terms of financing. The impact has been a bit more on the institutional and conventional lending sources.”

A Wave of Maturities
Many sectors of commercial real estate — including hotels — are expected to see a wave of maturities in 2023. Across all real estate sectors, there are slated to be roughly $162 billion in CMBS maturities, according to Cred IQ.

But lenders said that is likely to amount to more chatter than actually problems for the hotel industry.

“I don’t think it’s that big of a deal,” PMZ’s Berk said. “There’s a lot of capital out there, so I think there’s enough lenders that will figure it out. Hotel owners have generally had a very good year, and there’s been a pullback on expenses.”

Crosswy expects the same, although he said the wave of maturities will create some level of opportunities for hotel investors. It’s just unlikely to rise to the level of a crisis.

“It’s probably more noise,” he said. “A lot of these deals were well underwritten. A lot of this debt maturing is from 2012 or 2013, and coming out of the Great Recession, underwriting regulations changed to make things more prudent.”

Braun said that most of what he’s seeing is owners and lenders “working out” maturities, which has been an ongoing process since the onset of the COVID-19 pandemic. That doesn’t mean owners will necessarily feel great about how they come out of the process of refinancing.

“It’ll cost more, and you’ll likely be able to finance less,” he said. “You’ll probably have to bring some new equity.”

Relationships Matter
While lenders agreed there is still enough capital to get deals done, it is admittedly more limited than in more optimistic times. This has resulted in many lending institutions, particularly the regional and local banks that remain active, leaning more and more on relationships.

“On the institutional side, the banks and the like all tell me they’re saving their allocations for their very best customers,” Braun said.

Crosswy said Stonehill always keeps who it’s working with front of mind.

“We’re hyper-focused on the sponsor more than ever,” he said, citing a construction loan his company provided in December to someone who was previously a joint-venture equity partner on a project and another with a borrower who has worked with Stonehill going back to 2006.

Construction Money Still Scarce
One of the most consistent aspects of hotel financing since the onset of the pandemic is the relative scarcity of construction financing, which remains challenging even heading into 2023.

Crosswy said construction financing will remain more difficult and expensive given the relative risks, although his company likes the opportunity to do some given the timing.

“We think construction is a good place to play and deploy capital because you’re going to be building during a period where there’s going to be more challenges with a potential recession,” he said. “But if you can deliver a new product, there’s going to be relatively new product and you should be able to attract a premium ADR given you are the newest asset.”

Braun’s firm Hall Structured Finance is a construction and bridge lender in the hotel industry that often lends when others are more reluctant. He said the current environment is a big opportunity for his company, particularly for larger projects.

“So if you need a $100-million loan … the number of options you have has been greatly reduced even in relationship to prior years because the big banks are really on the sidelines,” he said.

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