Hotels Regain Attention From Traditional Lenders

"Hotels are once again drawing the attention of the more traditional lending institutions, albeit more slowly than other asset classes," says Jeffrey Davis, New York City-based executive vice president with Jones Lang LaSalle Inc. "As mortgage lending builds its reputation as a viable investment based on an improving risk/return profile, traditional lenders have re-entered the space in search of high-quality senior lending opportunities."

Hotel consultant Sumner Baye, president and partner of International Hotel Network LLC, agrees that there is a little bit of light at the end of the hotel tunnel. Although it is great to think positively in the next few years, he says, there is still a ways to go.

"Hotels have always and always will be very attractive to the lender, but over the past two or three years, lenders have stepped away," Baye says. He explains that a key reason lenders stepped away is because of overexpansion in the industry: "There were too many hotels at too fast of a pace."

According to Baye, one big problem that the industry is still faced with is that a lot of foreign banks that previously funded many large hotel projects have terminated their construction loans. "Without the source of construction funds, our industry has slowed down a great deal," Baye says. "And without the construction money, the hotel developer is hurting."

For things to improve on the lending side, Baye notes that the economy has to improve a little more before things will loosen up, and occupancy levels need to rise. "Although the daily rate is doing a bit better, and there are some good signs out there, people should play conservatively."

Henderson, TN-based Smith Travel Research projects that hotel occupancy this year will remain flat at 55.1%, with average daily rate decreasing 3.2% to $94.39 and revenue per available room also falling 3.2% to $51.99. However, STR says momentum will build in the second half, leading to occupancy increases of at least two percentage points to 56.3%, ADR rising 2% to $96.28 and revPAR growing 4.2% to $54.18.

[IMGCAP(2)]Bill Duncan, SVP and head of the Hilton Worldwide's Homewood Suites brand, says he has seen some loosening in the debt capital markets for hotel development deals in focused-service brands, such as Home2 Suites and Hampton Hotels and Suites. He notes that those deals "are easier to finance and have the franchised support from hospitality companies that are well-established in the focused-service space."

Duncan adds that things are also starting to move more quickly within the upscale focused-service market, for brands such as Homewood Suites that are being developed to meet the unanswered demand for extended-stay lodging options.

JLL's Davis notes that "the lack of top-tier deals and the willingness of some insurance companies to issue extremely attractively priced debt have forced many lenders back to the drawing board. This has resulted in compression within the debt markets."

For certain lenders, Davis says, it makes more sense to originate mortgage debt on high-quality hotels rather than stretch on less-attractive office or retail assets, or provide higher leverage. "Hospitality lending offers better locations, coverage and pricing than most other asset classes right now," he says, "and it has caught the attention of both foreign and domestic lenders looking to deploy capital early in the year."

According to Duncan, strong brands with successful and experienced developers of focused service hotels will be attractive to lenders as the economy continues to recover. "Focused service hotels offer developers and investors a lower risk model as these properties require lower overhead costs and appeal to a wide range of markets segments including, business, family, special need and general leisure travelers," he says.

"Added to that, many condominium projects broke ground during the tail-end of this decade's real estate boom and are now in default due to a lack of sales and investor funding," Duncan says. He explains that those "failures" are leading to opportunities for focused service developers since "properties are available at discounted rates and have an existing footprint conducive to focused service hotels."

Pent-up equity capital is rearing to get out of the gates and the dearth of opportunities in the sales market has capital providers turning to creative hospitality structures, according to Davis. "This frequently takes the form of 'rescue capital,' wherein a new equity provider injects fresh capital into a deal in conjunction with the lender agreeing to re-balance the debt and the borrower agreeing to subordinate their returns," he says.

These recapitalizations can offer a win-win-win situation for the borrower, lender and new equity provider, Davis notes: "Distressed borrowers are able to live to fight another day, lenders are able to pay down their exposure while re-structuring the remaining debt according to today's underwriting, and the new equity gets to deploy capital at attractive returns. A successfully structured recapitalization has the effect of removing the hotel from the distressed-asset hot list while keeping both the borrower and the new equity motivated to perform at the highest level."

Continue Reading for Free

Breaking commercial real estate news and analysis, on-site and via our newsletters and custom alerts
Educational webcasts, white papers, and ebooks from industry thought leaders
Critical coverage of the property casualty insurance and financial advisory markets on our other ALM sites, PropertyCasualty360 and ThinkAdvisor

NOT FOR REPRINT

Natalie Dolce, editor-in-chief of GlobeSt.com and GlobeSt. Real Estate Forum, is responsible for working with editorial staff, freelancers and senior management to help plan the overarching vision that encompasses GlobeSt.com, including short-term and long-term goals for the website, how content integrates through the company’s other product lines and the overall quality of content. Previously she served as national executive editor and editor of the West Coast region for GlobeSt.com and Real Estate Forum, and was responsible for coverage of news and information pertaining to that vital real estate region. Prior to moving out to the Southern California office, she was Northeast bureau chief, covering New York City for GlobeSt.com. Her background includes a stint at InStyle Magazine, and as managing editor with New York Press, an alternative weekly New York City paper. In her career, she has also covered a variety of beats for M magazine, Arthur Frommer's Budget Travel, FashionLedge.com, and Co-Ed magazine. Dolce has also freelanced for a number of publications, including MSNBC.com and Museums New York magazine.