Keep an eye out for an increase in hotel financing this year. There is a huge amount of CMBS loans coming due, which will force everyone who has been kicking the can down the road to look for new capital. CMBS lenders and debt fund/private money lenders will be more active than ever. However, also keep an eye out for more life companies and banks to fund deals. Travelers will continue to flock to quality properties, and hotel lending will mimic this trend. In years past, it was a flight to value; now more than ever, it will be a flight to quality. Look for an increased appetite for PIPs of any size to help bring hotels to economic health. Sales transactions should pick back up this year, leading to a need for capital. Although, LP equity will continue to be difficult to come by, which will make sales tough. Count on a continued flight to quality where the best assets will see top market financing, while the fringier, more distressed assets will need expensive rescue capital or will need to trade to value investors.
Rates coming down should lead to higher leverage. Borrowers will see 55% to 65% leverage for most deals, with a few pushing up to 70%. Rates will start in the 6% to 7% range. DSC will be 1.25x to 1.50x. Watch for debt yields to continue to compress and competition for quality assets in top markets to squeeze pricing tighter on permanent financing. Lenders will want a minimum 10.5% to 12% debt yield for the strongest deals. Deals with 14.5%+ debt yield will see the lower rates on stabilized basis. For bridge loans, most lenders want to see 9%+ debt yield going in.
Banks will start to open for top-quality borrowers. Look for Bank OZK, M&T Bank, BMO and Applied Bank to consider deals. Live Oak Bank will provide SBA loans. Bank lenders will hand out 65% LTC. Rates will be around 6.75%. Leverage will start at 55%. DSC will start at 1.25x.
Look for more life company lenders to enter the space. New York Life, MetLife and Farm Bureau Insurance will consider deals. Rates will be in the 6% to 7% range and life companies will prefer 14% to 15%+ debt yield. CMBS lenders such as Wells Fargo, Deutsche Bank, JP Morgan Chase, Citi, Goldman Sachs, Morgan Stanley, Argentic and KeyBank will be some of the most active players this year. CMBS lenders will want 13.5%+ debt yield and 6% to 7% rates.
Debt fund, bridge and private money lenders such as Madison Realty Capital, HALL Structured Finance, Access Point Financial, Driftwood Capital, LoanCore Capital, Bloomfield Capital, Avatar Financial Group, Arbor Lodging, Rockbridge, iBorrow, PCCP, AVANA Capital, LaSalle Debt Investors, Canyon Partners Real Estate and Hankey Capital will be bullish. Borrowers will see 10% rates and 70% leverage. Floating rates will be priced at SOFR+ 350 to 600 basis points.
Peachtree Group will originate $15M+ loans for all hotel types with an emphasis on limited and select service. The lender will provide up to 85% leverage and rates will be 7.50% to 10% depending on leverage, construction risk and cash flow. Peachtree will lend in most markets with multiple demand drivers.
A lot of post-COVID hotels were financed with recovery assumptions and ADR growth trends that might not be available in certain markets. Lenders will have to key in on actuals versus projections unless a real value-add business plan exists. Overly optimistic RevPar growth will be capped, and lenders will be looking at a recession-light environment versus super high growth with an expanding economy.
Hotels with major flags such as Marriott, IHG, Hilton and Hyatt will be sought after, along with resort-style hotels on the coasts. Count on select-service, limited-service and extended-stay hotels to see the most available capital. Independent hotels outside of a top coastal market will be harder to finance. Lenders will target larger, luxury hotels given the desirable nature from travelers and incumbent cash flow that follows. On the bridge/construction side, lenders will continue to target luxury flags in established markets.
New York, South Florida and the Carolinas should see continued attention, while some of the popular Southern markets such as Nashville, Tenn., Atlanta and Austin could experience some caution. Downtown metro hotels in most markets will be tough to finance, although New York City and Miami have been popular. Cities such as Chicago are seeing steady occupancy rates and hotels are trading at attractive caps to the buyer. Lenders will also start to trickle back into San Francisco this year.
Top-quality borrowers that can bring cash into deals will see plenty of lender interest. Lenders will desire a proven operator with experience, as well as strong net worth and liquidity. Borrowers with management under their belts will see the most available capital. Post-closing liquidity will be the number one factor, and lenders will want to make sure the borrower can absorb a downturn. A net worth greater than loan amount and liquidity of at least 10%+ of loan amount will be targeted. First-time owners will be tough.
