Sara Havlena
More lenders are going to be interested in hospitality for the foreseeable future. There will be ample capital going forward and it will come from a wide variety of sources. Watch for life companies, private money lenders and debt funds to be the most active, while CMBS will start to be part of the conversation again. Some banks are re-entering the sector, although most regional banks will still be limited. Debt funds especially had a tough 2023 so they have ample liquidity to put out. Lenders are seeing that they can grab yield in the hotel space as the pricing is higher than some of the other property types. More lenders will look to hotels as an attractive lending opportunity with improved fundamentals and more favorable pricing than multifamily or industrial. A decline in office and strong economic fundamentals make hotels an appealing alternative. As additional lenders become interested in this space, spreads will compress, and the market will become more efficient with new players entering the game.
Borrowers will see 50% to 70% leverage. Bridge lenders will be in the 65% range: up to 75% for the strongest deals with upside. SBA loans will be underwritten to 75% to 80%. Rates will depend on the nature of the asset and cash flow. Borrowers will see 6% to 10% rates. Bridge loans are being priced in the high single-digits for light lifts and low double-digits for riskier deals. The lower tier deals/flags will have to get comfortable with SBA or bridge pricing. Look for a 1.35x DSC, accounting for 3% management and 4% FFE and/or 12% to 15% debt yield. For bridge deals, debt yield will be between 9% and 12% going-in with 13% to 15%+ stabilized debt yield. Lenders will keep a close eye on tightening spreads and rates.
The major money-center banks such as JP Morgan Chase, Goldman Sachs and Deutsche Bank have capital to lend. Bank OZK, HarborOne Bank, One Florida Bank and Applied Bank will also fund deals, along with foreign banks such as Riyad Bank and Oriental Bank. Expect banks to get involved if they are getting cash deposits to be held with the bank, obtaining the large operating accounts of these properties — which are among the largest of any asset class — or using their balance sheet to feed into their CMBS business line or other non-CRE relationship motivations. Bank lenders will pursue hotels with Hilton, Hyatt, Marriott and select IHG flags. They will prefer select-service assets with at least 100 keys or 170 to 225 keys for dual-brand properties. Select life companies such as New York Life, Nuveen, Symetra and MetLife will also be active.
The CMBS market is making a big comeback as the sizing/pricing has become relatively attractive, along with their ability to do larger or lower quality deals, an essentially unlimited appetite for hotels and a lack of need for deposits or recourse. CMBS lenders such as Wells Fargo, Barclays, Deutsche Bank, KeyBank, Morgan Stanely, Goldman Sachs, BMO, Starwood Mortgage Capital, Argentic, Greystone and Basis Investment Group will fund deals. Borrowers will see rates start around 7.5%.
Debt funds and private money lenders such as LaSalle Debt Investors, CrossHarbor Capital Partners, A10 Capital, LoanCore Capital, Thorofare Capital, Bloomfield Capital, Hankey Capital and Red Oak Capital will provide bridge loans. HALL Structured Finance, Madison Realty Capital, ORIX USA’s Real Estate Capital Group, Canyon Partners Real Estate, AVANA Capital and INCA Capital will fund hotel construction.
Lenders will target select-serve and compact full-service assets located near multiple demand generators. Most balance-sheet lenders will target high-quality, flagged properties — primarily Marriott and Hilton — in established lodging markets and with at least a full trailing-12 months of operating history. The focus will be on favorable historical performances, strong sponsorship and quality flags and managers. Lenders will be a bit more hesitant in terms of underwriting big jumps in future performance, driven by market factors. There needs to be a true value-add story where a new operator will come in and run the asset more efficiently or inject capital into improving the property to drive increased performance. Rising insurance costs and overall higher expenses could negatively affect many deals.
The hot markets will be ones that did not see big performance pops or new supply waves coming out of COVID-19 like some of the gateway markets such as New York City or Boston, and certain leisure areas, particularly in the state of Florida. Markets with $100+ RevPAR will be preferred. Deals in the Sunbelt such as Nashville, Tenn., will see plenty of available capital, while Chicago, Minneapolis, Washington, D.C., Los Angeles, San Franscisco and Silicon Valley, Calif., will still be tough.
Resort properties in Florida and along the Coasts will see some stricter underwriting. Secondary and tertiary markets will be stable, which could bring more lenders to the table.
Lenders will want to make sure the borrower is well capitalized. Net worth should equal the loan amount and count on lenders to want 10% in post-close liquidity. The more hotel experience, the better with five to 10+ hotels in current portfolio targeted. Sponsorship experience with the business plan, market, brand/flag and property type has become extremely important. There is plenty of non-recourse financing available, with the exception of local and regional banks, which most of the time will require recourse. Lenders want to see 5% to 10% of loan amount in deposits for depository institutions.
