Uncovering the clues to secure hotel financing in 2024
Many financial experts are voicing opinions about the rising interest rate environment and fear how this is disproportionately affecting the availability of hotel financing. More than two-thirds of recent survey respondents for the 2023 EY and NYU Hospitality Finance Study predicted hotel transactions will slow down in 2024 as borrowers grapple with inflation, rising interest rates, soaring labor costs, and access to capital.
But is all news in the world of hoteliers bad? While there’s still a looming concern about the bank crisis and liquidity constraints, the hotel industry itself is still outperforming expectations. Q1 2023 revenue-per-available-room-rates exceeded a 13% increase over Q1 2019, driven primarily by average daily room rates. Projects at large are still viable, albeit with additional volatility these days.
Surprisingly the hospitality segment has proved resilient through consistent headwinds during the past few years, including increased construction costs and labor, the pandemic, and now a lack of access to capital. Here’s how to wisely plan for 2024’s economic landscape and secure financing.
FOCUS ON THE FUNDAMENTALS
Borrowers will need to reassess their own capabilities as well as their vendor’s. Before pursuing any project, you must determine:
1. Does the project strategy fit in today’s economic environment?
Today, e-commerce and rising labor costs make extended-stay, drive-to markets, and logistics corridors more favorable.
2. What are the monetary risks?
As banking activity retracts, borrowers can expect increased financing costs. Even private lenders will require higher equity injections due to interest rate risk and DSCR constraints.
3. What’s your track record?
Lenders are going to favor borrowers who have a track record of delivering as they vertically integrate or align themselves with partners who can also deliver.
According to Reuters, finances are hard to secure due to stress on regional banks. Many seasoned developers are turning to private lenders to get their projects done as bank approvals are experiencing extended wait times or outright declines. What limited capital that’s left in the market will favor institutional or stronger transactions in select target markets. Lenders will want to see that you have a good handle on your guests’ needs and you understand the nuances of the market.
SHOW, DON’T TELL
Data demonstrates the pathway to your success. Consider location and how it factors into your business. How will you drive value in that market? What’s your competition? Are you tapping into a new underserved market or are you capturing a share of the market from your competitors?
Consider the advantages your project has over other hotels. Is there a restaurant, laundry available, weekly rates, or is it walkable to anything? Is there access to freeways? Whatever these factors may be, it’s imperative you use data to build your case.
For some deals, particularly development deals, the project may not fit the bill. If the project isn’t attractive in today’s market – or perhaps your costs to develop are prohibitive – consider sitting on the land until a better time to build and stay up to date with current market trends.
Having familiarity with what’s going on in the market is key to preparing for a smart strategy.
National hotel performance certainly has defied expectations, but there are several markets that either haven’t come back or have evolved. However, until rates begin to move in the opposite direction, we’re going to see gridlock for new deals. Capitalization or cap rates haven’t risen with treasuries. As we get into 2024 and mostly 2025, those hotels that are locked in term debt, at the deepest point of low interest rates, will hit rate resets and may not be able to service debt at market rates. This may force borrowers to re-margin their loans or be forced into sale. A cashin refinance is a novel concept we may be seeing more of in the next two years.
What does this mean for regional banks that are overexposed in hospitality? They start to offload hotel debt at discount rates. Be sure to build relationships as it will be pivotal for borrowers in the future and talk to the experts for the guidance you need.