Difficulty Securing Financing Halts More Than Half Of U.S. Hotel Development
Well over half of the hotel projects that broke ground or were in pre-construction this year are now on hold, largely due to more stringent lending standards making it harder to secure funding.
Build Central Inc. found that since March, 59 of the 98 total U.S. hotel projects that broke ground or were in the pre-construction phase have been paused, Reuters reported.
Developers, private equity firms and contractors told Reuters that the financial stress on regional banks is the main culprit. The collapse of Silicon Valley Bank, Signature Bank and First Republic Bank earlier this year has made regional banks, the largest lenders to hotels and other commercial real estate projects, more wary of their exposure to the industry.
This has made it difficult for even the most established hotel brands to secure financing, Reuters reported.
"The regional banks that used to be active for us 9 to 12 months ago are not showing up to finance hotels for us today," MCR Hotels Chief Investment Officer Joseph Delli Santi told Reuters. MCR Hotels is the third-largest U.S. owner-operator of hotel brands.
Smaller hoteliers without existing lending relationships have also struggled to get financing, said Andy Ingraham, a hotel developer and president of the National Association of Black Hotel Owners, Operators & Developers, according to Reuters.
In late April, panelists at Bisnow’s Lodging Investment Summit in Washington, D.C., acknowledged the difficulty, though they remained optimistic.
“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.
Higher construction costs were also a contributing factor to projects that were delayed across Florida, Texas and California, James Hansen, executive vice president of business development of hotel developer and operator Hotel Equities, told Reuters.
In some cases, borrowing money requires having more money.
“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,” Marc Magazine, executive managing director of Savills Hospitality Group, said at the Bisnow event.
Construction loan interest rates can be as high as 9% to 10%, up from 4% two years ago, Reuters reported.
Out of 24 banks that held more than $125M in outstanding hotel and motel loans, 14 of them showed quarter-over-quarter decreases in Q1, according to an analysis by S&P Global Market Intelligence.
Some overexposed banks began offloading their CRE loans at a discount, Reuters reported. PacWest Bancorp announced in May that it would sell a $2.6B construction loan portfolio.
While financing may be hard to secure for construction, the rate of delinquent CMBS loans in the lodging industry remains well below its peak in the early months of the pandemic. It increased in May, though, by 21 basis points to 4%, representing $4.1B worth of loans, according to an S&P Global report. The rate of special servicing for lodging industry CMBS loans decreased, however, by 12 basis points to 5.9% of loans.
