There will be ample liquidity available for hotels from all lender types going forward. Spreads will likely hold where they are today assuming base index rates do not continue to increase. The diversity of lenders in the market will continue to refine. Watch for real liquidity from the banks and life insurance companies as they come back into the market. Benchmarks are up, which means rates will rise and loan amounts will fall. There is also pressure on DSC covenants given higher rates. While macroeconomic factors may cause tourism to dip in the short term, there is going to be upside in the sector that will come to fruition within the next five years.
Watch for more lenders to be comfortable with 70% leverage going forward, although most of the capital will be available in the 55% to 65% leverage range. Borrowers will see mid-6% to high 6% rates. Bridge loan rates will be high 3% to 4% over SOFR. DSC will start at 1.25x to 1.30x. Lenders will prefer 12% to 13% debt yield, although newer hotels in preferred markets will see 11% debt yield. Look for continued discipline and focus on underwriting expense growth for all hotels, not just union assets that have historically been a target for larger expense pressure. Lenders will be more focused on historical occupancy numbers and operational expenses to ensure that the numbers make sense. Count on
lenders to underwrite based on the trailing-12 and how the hotel is performing versus other properties in the market.
Banks such as Goldman Sachs, Western Alliance Bank, Bank OZK, Great Southern Bank, Inwood National Bank and Applied Bank will be active. Many banks will prefer 50% leverage. Banks will require some level of recourse and want to see global DSC at 1.20x to 1.25x on the current rates. Expect the local community banks to fill the void in the sub-$25M loan range. Life companies such as MetLife, PGIM Real Estate, New York Life, John Hancock, Pacific Life, Barings and Aegon will also pick up market share. Spreads will be in the high 100 to mid-200 basis point range and borrowers will see 55% to 60% leverage. Life companies will prefer flagged properties and deals in larger markets.
CMBS lenders such as Wells Fargo, JP Morgan Chase, Goldman Sachs, Citi, BofA, Morgan Stanley, Barclays, Deutsche Bank, Societe General, BMO Capital Markets, Argentic, Natixis, KeyBank, Basis Investment Group and Ladder Capital will be some of the most bullish hotel lenders. CMBS lenders will offer five-year interest-only terms and 65% leverage. Debt funds, bridge and private money lenders such as Peachtree Group, PCCP, Access Point Financial, CIM Group, Driftwood Capital, Brookfield, Blackstone, Apollo, Mesa West, Fortress Investment Group, Madison Realty Capital, Ares, GoldenTree Asset Management, Avatar Financial Group, Rockbridge, Prime Finance, iBorrow, Forman Capital, Red Oak Capital Holdings and Bloomfield Capital will also be extremely active.
Count on lenders to gravitate toward branded properties such as Marriott, Hilton, IHG and Hyatt. Boutique hotels with favorable histories will also be considered. Lenders will seek full- or limited-service properties. Suburban hotels or those near airports are less desired because of limited demand generators. Big-box convention hotels should start to see more traffic over the next 12 to 24 months.
Lenders will target hotels in drive-to leisure areas with steady demand generators. Hotels in urban markets will see more interest because of high barrier to entry and diversified demand metrics from both leisure and business travel. New York City, San Francisco, Seattle, South Florida, Southern California and Philadelphia will be targeted. Also, expect a focus on well-located resorts in Sun Belt markets throughout Florida, Arizona, Texas and Colorado. Lenders will also be attracted to markets that have limited Airbnb availability and other limited short-term stay options. Lenders will want to finance hotels in more primary and secondary markets with either older hotel stock or areas that are under-hoteled. Lenders will be cautious in Washington, D.C., Chicago, Los Angeles, Austin and other cities that have seen significant supply. Assets in tertiary markets with barriers to entry and lack of competition can get done with CMBS as long as they show cash flow. Portland, Ore., will be tough because of declining fundamentals.
Lenders will prefer an experienced operator and target high-quality management companies. There will be a focus on strong track records and borrowers need to show enough liquidity to cover if something goes wrong. Lenders will seek a borrower who has partnered with an operator on a number of hotels in the past or someone who has experience in operations and can bring in the right management team. The lender needs to see how the borrower puts a deal team together and be comfortable that they know what they are doing. First-time owners will get financing from SBA lenders.
