It’s not fair to expect lenders to be gatekeepers
It’s not fair to expect lenders to be gatekeepers
12 MAY 2017 7:24 AM

The hotel industry seems to be counting on the banks and other lenders to provide a check against their own bad decision-making and growing supply. It’s time developers took that responsibility on themselves.

After spending the bulk of this week in Los Angeles for the 27th annual Meet the Money conference, there was one thing I seemed to be hearing over and over again that irked me just a bit.

Many speakers pointed to the fact that construction lending was considerably more difficult to come by these days, and while that isn’t great news if you’re someone waiting to get a shovel in the ground, many lauded this as overall good news for the industry.

We’ve all heard this rationale at one point or another: Hotel developers build hotels. That’s what they do. When periods of high supply come around, they don’t necessarily factor that into their decision-making as much as they should and end up making bad financial decisions—not just for themselves but for their competitors around the corner.

Thankfully, this particular line of thought continues: Lenders are a bit more hesitant to hand out money at points like this, providing a natural buffer against supply growth and keeping the developer’s worst impulses in check.

The problem with all of this, obviously, is it puts the onus of the developers’ own bad decisions on some outside entity and it’s not even a real defense against supply growth.

People will always find access to capital to make bad business decisions, even if that capital ends up being a bit more expensive. Lenders at the conference basically said they’ve got lines around the block of people looking for construction financing at a time where all anyone can talk about is worries about new supply coming online.

I understand a lot of the time growth is a necessity for a business, so it’s important to show you’re doing deals and making things happen. But that’s not an excuse to do bad deals that could serve as an unnecessary gut punch to a market or submarket.

This is an addict blaming his dealer. If you as a developer make a bad decision, it’s not the bank’s fault for enabling you.

If there are key secondary or tertiary markets and submarkets that aren’t over-supplied and you’ve got a great location, go for it. But don’t build just anywhere because you’ve got a hole burning in your pocket.

What do you think? Let me know via email or on Twitter.

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