5 things to know about the state of hotel financing
5 things to know about the state of hotel financing
29 MARCH 2018 8:14 AM

Lenders shared insights about the state of hotel financing during a panel at the recent Hunter Hotel Conference.

ATLANTA—Money is available for hotel projects these days, but hoteliers should know conditions vary greatly depending on what they’re seeking.

Experts speaking during the “Hotel financing” panel at the recent Hunter Hotel Conference discussed some of what they’re seeing in the world of lending.

Here are a few key takeaways about the current state of hotel financing.

1. CMBS markets are strong
When asked how things are faring with commercial mortgage-backed securities lending, Jason Ourman, managing director and head of real estate structured finance for Bank of America Merrill Lynch, said “markets are broadly healthy.”

He noted there was roughly $95 billion in CMBS lending in 2017, which he projects to decrease to roughly $85 million for 2018. He attributed the dip “not to a lack of appetite but to a competitive market.”

Ourman said he’s seeing leverage on deals is capping out at 75% but he’s “seeing most loans in the 65% to 70% range.”

“Quality in the market matters, but cash flow is really key for pushing leverage,” he said. “And there’s a high sensitivity to the flag and success of the manager.”

He noted he was surprised with the strength of floating rate CMBS loans in 2017.

2. Construction is difficult
Lenders and a hotel developer/owner on the panel agreed that construction financing isn’t easy to come by these days, and securing money for development often comes down to finding the right partner.

“We’re still making construction loans, but we’re very particular about our clients,” Ourman said. “If you’re not an existing borrower today, it’s going to be extremely difficult to get a shovel in the ground.”

Mark Laport, president and CEO of Concord Hospitality, noted his company was able to secure financing for the construction of a Hilton Garden Inn in Roslyn, New York.

“The debt we chose was not very exotic,” he said. “It was 35% real cash to cost. We went out and looked for competitive pricing from about a half dozen lenders. It was much harder getting a half dozen lenders today than say about 24 months ago.”

Jon Wright, chairman and CEO of Access Point Financial, said his company largely shies away from ground-up lending but does offer a short-term product with an average of 22 months. Several panelists agreed that it comes down to partnering with community banks and regional players to get construction financing today.

“The community banks are still there,” Wright said, noting this is largely true if you already have some sort of relationship with those banks. “It’s typically regional or community (banks) with strong partnerships.”

Scott Andrews, managing director of hotel franchise finance for Wells Fargo Bank, echoed Ourman’s sentiments and noted his company does do some construction financing, but it’s largely limited to “sponsors with a deep history of high-quality assets.”

3. The favorability of refinancing is changing the math when it comes to selling
The cost of refinancing remains relatively favorable, which factors in to how potential sellers are looking at their owned assets. But Laport noted that doesn’t mean conditions aren’t right to sell.

He said his company is currently active in both selling assets and refinancing others to continue holding. Sometimes the decision comes down to what a buyer is willing to spend.

“I’ve been surprised even at this meeting that there are still some very aggressive buyers out there looking for product, which the end result means cap rates remaining lower than I would’ve thought, especially considering what’s happening in the lending market,” Laport said. “It’s a great time to be a seller if I have great product.”

Panelists agreed potential sellers are in a good spot to refinance and hold assets, if that’s an option. But sometimes properties must be sold.

“You have some sellers that if they don’t get the pricing they want, they can put it on long-term refinancing,” Andrews said. “But there are some funds that have to be deployed.”

4. There are different lenders for different projects, products
As the group of lenders on the panel represented, there are different lenders for different sizes and kinds of projects.

Ourman noted that the desired deal size for some CMBS floating rate financing types is in the hundreds of millions of dollars, while fixed rate conduit bottoms out at $14 million.

Wright said his company’s average transaction is in the ballpark of $5 million. Access Point’s largest project was around $80 million for a hotel in Chicago.

5. Lenders less worried about end of cycle, macroeconomics
Ourman noted lenders’ viewpoints on the state of the industry are often a moving target, but they seem to be more favorable than in the recent past.

“It’s a question where every single quarter we have a different view,” he said.

While lenders were worried about a dip in performance in oil markets in late 2015 and early 2016, Ourman said there is now “nothing on the horizon that worries us” even as they see growth slowing. There’s also reason for optimism with the broader economy.

“The big ‘but’ is that every day can come up with a different trend line,” he said. “But we feel fine. With unemployment as low as it is, it’s hard to find examples of any recession with unemployment where it is now.”

Laport noted there’s a clear downside to the low unemployment in the U.S. as it leads to increasing labor costs.

“It’s harder and more expensive to hire new employees, and your margins are stressed. … With nominal growth in RevPAR against growing costs across the board, it’s just harder to make the money we have been making,” he said.

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