Hotel lending expected to remain healthy throughout 2018

NATIONAL REPORT—A variety of opinions are out there when it comes to the current lending landscape with optimism and a good dose of concern about where the economy is in the current cycle both in the mix.

To get a sense of what is happening in the lending arena, Hotel Business chatted with several lending executives. They are Chris A. Chiotis, principal/founder of Pacifica Capital & Brokerage Inc. in Dana Point, CA; Geoffrey E. Davis, senior principal with Davis Hotel Capital Inc. in Denver; and Arthur Fefferman, president/CEO, AFC Realty Capital in New York.

How is the lending landscape for hotels so far in 2018?

Chiotis: The flow of new loan requests continues to be strong through the first quarter of 2018. At the same time, some lenders believe that the hotel sector is peaking and have begun pulling back a bit. While the fundamentals of the overall economy continue to be strong, some lenders are starting to have concerns about the amount of new supply that has recently come online or that is in the pipeline for many markets throughout the U.S.

Davis: There remains plenty of debt capital available to hotel owners and developers. That said, we are in a rising-interest-rate environment and debt terms such as LTV and spreads are changing, making for a more conservative lending environment.

Fefferman: The hotel lending market remains buoyant, reflecting the continuing strength and stability of the economy and the hotel market. The inflow of capital for hotel lending is healthy. Overall, lenders are maintaining reasonable vigilance of underwriting and markets with oversupply.

What kinds of lending terms can owners/developers expect?

Chiotis: We all know interest rates are on the rise, but we continue to place fixed-rate purchase and refinance debt on hotels throughout the U.S. by way of our strong lending relationships. Depending on strength of the sponsor, nature of execution, quality of the asset and location, rates are generally in the mid-to-high 4% range. With the 10-year treasury approaching 3%, it is important that owners move to execute terms with an intermediary that specializes in hotel finance, as lost time underwriting a deal can be costly to the borrower in this rising-interest-rate environment.

Davis: More pressure on lowering LTV/LTC, and higher spreads and more conservative underwriting; while debt funds are opportunistically filling some of the gaps, the cost of that capital is higher than bank debt.

Fefferman: While interest rates have risen in recent months and additional moderate upward trends are forecasted throughout 2018, interest rates continue to be manageable. Interest rates for five- to 10-year fixed terms should remain stable in the 5-5.5% range with leverage on senior debt in the 6.5-7% LTV range.

What is getting a lot of play: fixed rate, floating rate, mezz or other types of debt? And for what?

Chiotis: Construction financing continues to be in demand. We recently funded an independent boutique hotel in the Los Angeles area with an LTC of 75%. For the most part, our clients are requesting long-term fixed-rate product. Many are opting out of floating-rate product that has seen upward pressure as a result of the recent Fed adjustments and resulting uptick in the prime rate. We are seeing floating-rate requests for deals in need of renovation or repositioning, and have a short-term hold horizon. Requests for nonrecourse debt is also on the rise as the cycle appears to be moving into “extra innings.”

Davis: The most requests we get are for development and construction financing, which is getting tighter and tighter. A good project with a strong sponsor can still get done, but it will require more equity in the years ahead, hence the emergence of mezz and pref equity players for ground-up projects.

Fefferman: With the strong supply of capital by a growing “bench” of lenders, the options of fixed, floating, mezz and preferred equity is ample. The appropriate type of financing is deal strategy driven—higher leverage with mezz, value-added flexibility with floating rate, stabilized long-term holders with fixed-rate.

Are certain lodging segments, e.g. select-service projects vs. full-service, or markets (primary, secondary, tertiary) a better bet for financing right now? Why?

Chiotis: Existing full- and select-service product in the major CBDs around the U.S. continue to receive the most favorable look by lenders, while limited-service new-construction product in secondary and tertiary markets tends to receive the most strict underwriting.

Davis: Select-service is always going to get the most play from all levels of lenders, as it is the easiest to underwrite. Full-service and resort financing is still plentiful for existing assets, but tightening for development of those types of projects.

Fefferman: The institutional, REIT, public/private mortgage funds favor primary and secondary markets with the tertiary markets being the focus of local lenders, banks and credit unions. Some lenders may distinguish between full- and limited-service in their lending appetite.

What does the climate look like for the rest of 2018 and beyond?

Chiotis: We believe the hotel sector will continue to post strong performance through 2018 and beyond. Underwriting will become more of a balancing act, as the debate surrounding where we are in the cycle continues and we better understand how many “extra innings” are on the horizon.

Davis: Plenty of capital is in the market, but owners and developers need to adjust their expectations, as clearly the froth is out of the market.

Fefferman: Barring any unexpected economic or political crises, hotel lending is expected to remain healthy. The opportunity for a borrower is to identify competitive lending sources for a deal, in which an investment banker/mortgage broker can be instrumental in adding value. HB