Hotel Financing Activity Has Stalled, But Execs See Market ‘About To Break Open’

Lenders are getting impatient. Check-in desks and rooms need a tuneup. Investors are tapping their feet waiting for their checks to be spent.

These are the kinds of challenges coming to a head in the hotel landscape that are expected to help thaw the recent freeze in the industry's financing markets, several executives said Tuesday at Bisnow’s Lodging Investment Summit. 

“There's been a big block in the industry where people haven't been financing. People haven't been selling. And I think that's about to break open,” Peachtree Group Chief Investment Officer Brian Waldman said at the event, held at the Hilton Washington DC Capitol Hill. 

“The lender is saying 'I’ve extended you for the last three years, you gotta pay me.' Brands are saying 'you haven't reinvested in your assets, you’ve gotta do that.' You can’t just keep kicking the can,” Waldman added.

Those external pressures from brands, lenders and investors are about to force transactions in the immediate future, panelists said. This could lead to a flood of activity after three years of relative stagnation caused by the pandemic and by rising interest rates slowing the debt market over the last year. 

“During Covid, the lenders, the brands, I think for the most part, everybody was playing nice in the sandbox. Those days are over with,” LW Hospitality Advisors CEO Dan Lesser said. “There is this wall of maturing debt that's coming. That's a fact, that's not an opinion. And something's going to have to give.”

One factor making its way through the floodwaters: a dire need for property renovations that were put on hold for the past three years. 

“Nobody renovated during Covid, unless you're really smart and very few people were that smart or had the access to capital to do it,” said Wyndham Hotel Group Chief Development Officer Chip Ohlsson. “And so they came out of Covid and needed to make their money that they lost on Covid, so they didn’t renovate then.” 

Those delays are now at a breaking point, with brands getting impatient and unhappy with the deterioration. And the time has come when lenders are unwilling to look the other way on loans coming due.

“Banks are starting to get more pressure from the regulators, which means that they're going to put more pressure on the borrowers, which means people are going to have to do something. What does that mean? You’re going to refinance or you’re going to sell,” Waldman said. 

Those transactions, he said, have already started to materialize.

"The first quarter on the lending side was slower than expected, now it’s started to hockey stick up because people are starting to get their backs against a corner and they have to do something," Waldman said. 

The pressure on parties to transact has come at an inopportune time for financing, with debt becoming more expensive. Last month, the Federal Reserve raised interest rates for the ninth quarter in a row to just below 5%.

“A year ago, financing might have been available for 60 to 65% of cost. Now it's 50 or 55% if available, maybe less, so your equity has to be more, or your ability to get several layers of equity has to be more,” said Marc Magazine, executive managing director of Savills Hospitality Group. 

But panelists agreed there’s cash out there for those who can afford it. 

“There is a formula out there, if you're a strong enough buyer, to get conventional financing — just not the percentage that we're used to from a year ago,” Magazine said.

“There’s a lot of capital out there, it's just can you afford the cost of it versus other options like an exit,” Noble Investment Managing Director Adi Bhoopathy said.

Dana English, CEO of Excel Group, is familiar with the give and take in this market when it comes to deciding if you can afford to finance a property. 

“Mostly for us, it's the cost of the debt more than the availability of debt," she said. "Just as it makes sense, once you do your underwriting, can you afford to pay for that debt."

As for the timeline of all this activity, panelists tended to agree that it’s coming soon, certainly within the next year. Magazine said we might not see the flood right away, given the high interest rates, but it won’t be long. 

“We're looking for pretty active ’24, and I would assume continuing to ’25,” he said. 

Waldman had a similar timeline in mind.

“We're setting up for a very active transaction market on debt and the equity side in the back half of this year, going into next year," he said. 

With all the activity, panelists were optimistic about the industry’s future, three years after a pandemic caused hotels to be left out to dry. 

"We're very bullish. I think that the hotel fundamentals with the exception of a very small number of cities are actually very strong today,” said Jason Epstein, Sonder’s regional director of real estate. “I think that the future is actually very bright."