At the ALIS Summer Update in Boston, hotel lenders said they’re looking for projects with trustworthy sponsors and interesting stories.
BOSTON—Regulatory issues and concerns about overbuilding are mudding the lending environment for the hotel industry, experts said at the recent Americas Lodging Investment Summit Summer Update event in Boston.
A panel of three lenders shared some of their top takeaways on the hotel industry’s lending outlook.
1. Markets help determine what lenders might bite
The panelists said the types of lenders who are interested in a project are dependent on the types of markets a developer or buyer is interested in. Some larger banks want to focus on major gateway markets, while other lenders see opportunities in growing secondary markets.
“I like secondary markets, candidly,” said Dana Tsakanikas, EVP for Stonehill Strategic Capital.
Jeff Frank, a VP at Goldman Sachs, said market is a big factor in determining the feasibility of a project, particularly from the outlook of a CMBS lender.
“There’s a continued appetite, but there is more caution in certain markets, with supply being a top concern,” he said.
2. Relationships are key
Panelists said relationships with lenders are key to getting deals done. This seems to be particularly true for regional banks, which often are a source of necessary funding for hotels in secondary markets.
For projects that “big banks will pass on,” developers or buyers should “go to regional guys within an hour’s drive of the market,” said Chris Haynes, president of Broadacre Financial.
Tsakanikas said those relationships help color his outlook on a deal and can bolster his interest in deals in secondary markets.
“You might consider Charleston, South Carolina, as secondary, but I’d do deals there all day long,” he said. “I’d be comfortable going up in the capital stack on (those deals), and if you’ve got relationships with a local or regional bank with aggressive financings, we could layer in a preference piece.”
3. Construction money still difficult
Lenders on the panel said it’s still two different worlds when it comes to lending for stabilized asset transactions versus new construction.
Tsakanikas said it can be difficult to even stay on top of the pricing of available construction financing today, noting it is “all across the board.”
“For a lot of construction deals, the pricing is changing as the deal goes along,” he said.
Frank said his company has done some development “in the past,” but doesn’t have the appetite for it today.
“We really don’t have the capacity for any development,” he said.
4. Impacts from other real estate sectors
Haynes noted that concerns in other sectors seem to be spilling over to the world of hotels.
“We’ve seen two things happening in the market,” he said. “Banks and funds are pulling back on hospitality lending and becoming more selective, and in retail, more insurance companies are being much more conservative. … They’re more concerned about the cycle than anything else, and because of that, hospitality and retail have been the most difficult (sectors).”
He said that means borrows should start looking for their project funding earlier in the process.
5. Worries linger over disruption
Panelists shared some concerns that might play into the end of the current cycle and the possibility of a downturn.
Haynes said he keeps an eye on key submarkets in places such as New York, which has suffered through a combination of new supply and a drop in international travel. He said the supply issue can’t be ignored in some pockets.
“Lenders are really focused on new supply,” he said.
Tsakanikas said he has persistent concerns about the distribution landscape and how large tech companies could enter the field seemingly at any moment to completely disrupt the status quo at a time when revenue growth is slowing.
“There could be disruption from a group like Google that we don’t see coming,” he said.
Frank said what keeps him up at night is the idea of some marquis deal going south in a way that casts a pall over the entire market.
“From a capital markets perspective, the biggest thing would be in a market with a lot of supply where there’d be a big default nobody saw coming,” he said. “Particularly if it was in New York, where investors are centralized. That could scare many off from the asset class.”