How low will interest rates go, and when?

The banking and credit outlook was a hot topic on everyone’s mind at ALIS, especially as The Federal Reserve had just signaled plans to lower interest rates in the U.S. this year.

So, it should come as no surprise that a breakout session about that very subject started with an ask by moderator Kirsten Smiley, managing director, HVS, about expectations/predictions for interest rate decreases for 2024.

The most bullish answer came from Wells Fargo Bank Managing Director Anand Jobanputra, who at the time of the session on January 24 said rates could go up by 1.5% to 2 percentage points by next year and that there was a 50% chance of a cut by the end of the first quarter. That sentiment might have changed now that the Fed secretary has signaled a more drawn-out process to cut rates.

Host Hotels & Resorts Senior Vice President of Strategy and Analytics Deanne Brand said the Fed’s signal to lower rates has already significantly improved capital markets. “The CMBS market is active and improving, credit spreads are coming in, and it will be interesting to see how this year plays out,” Brand said, adding that she is optimistic about the Fed’s stated intentions.

We did $1 billion financing for KSL to buy Hersha that wasn’t available eight months earlier, and now that market is still open today and actually believe it is higher than $1 billion. So, we will see more transactions in 2024, and KSL-Hersha was a catalyst for that.

Derek Roth

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The other REIT representative on the panel, Ashford Chief Financial Officer Deric Eubanks, not surprisingly said rates coming down are music to his ears. “We have a lot of refinancings to do and like a lot of owners we were thinking wait and not do anything that we don’t want to do,” he said. “We’ve had to hit the pause button as much as we could, and just trying to wait it out, ending up closer to final maturity dates, which usually I’d like to stay in front of… But when the market was so difficult, and we had existing debt that was so attractive and couldn’t be replicated in the market today, you have to hit the pause button.”

Eubanks added that he expects the market to increase lending activity. “There’s plenty of capital available – there’s no shortage. It’s just not as attractive as it was a few years ago and owners are just coming to terms with the new reality in the market. So. I’m bullish in terms of activity level. There’s going to be a lot more transaction activity on all sides – acquisitions, sales, refinancing.”

The investment fund representative on the panel, Singerman Real Estate Senior Vice President Rebecca Cocchiola, said they have held off on a lot of potential sales given the lack of liquidity or the expensive debt. “Our expectation is that with rate cuts, liquidity will increase and there will be more interest [in buying]. So, as a seller, we’ll probably look at selling some assets that we hit the pause button on last year.”

Derek Roth, partner at advisory firm Paul Hastings had the final word on the impact of potentially lower interest rates and prefaced it buying saying, “I can’t imagine anything worse than last year.” But he was quick to add that his group has seen so much creativity around solving problems for lack of debt, whether it’s affiliate loans, preferred mezzanine debt, people handing keys back.

“A lot of people were forced to make decisions that they wouldn’t make in a normal market with better liquidity,” Roth added. “So, it does feel like everything’s turning in a good direction. I think the prevailing wisdom is right in terms of rate cuts.”

I personally think the question is costs are still elevated. So, can buyers and sellers come to an agreement on valuation and where people are willing to trade?

Deanne Brand

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Despite all the financing challenges, hotels have managed more favorably than other asset classes. Wells Fargo’s Jobanputra said they favor hotel loans right but still only did about $800 million last year compared to a typical year of about $3 billion of hotel lending. “With rates coming down, it will lead to more transaction activity, which will lead to more lending in the space,” he said, adding that spreads will also start to tighten once the competition for loans resumes.

Cocchiola echoed Jobanputra’s sentiment that Singerman will focus on dispositions as liquidity frees up and added that as some loan maturities approach, they will also look at refinancing. “We just modified a loan to get an extra year out of a current lender on an asset we don’t think we’ll hold for much longer,” she said. “But for a portfolio we’re going to hold for a longer period of time, we’ll probably look to get a new loan.”

When asked about how construction financing will manifest itself this year, Jobanputra said he expects developers will have to reserve more capital than they have been doing previously. “I think it’s going to get harder and harder to do construction financing… From a bank’s risk-return perspective, we would prefer to do an acquisition deal that we can actually put all the money out on day one and collect our interest because we’re the ones that make loans.”

On the merger and acquisition front, Paul Hasting’s Roth said it advised KSL on its acquisition of Hersha Hospitality Trust and is among the advisors to Choice Hotels on its plan to acquire Wyndham Hotels & Resorts. “Previously, these big M&A transactions wouldn’t have happened because there wasn’t a market to do $1 billion dollar financing,” he said. “We did $1 billion financing for KSL to buy Hersha that wasn’t available eight months earlier, and now that market is still open today and actually believe it is higher than $1 billion. So, we will see more transactions in 2024, and KSL-Hersha was a catalyst for that.”

Eubanks added that the most attractive and efficient financing today is for these larger deals. “For an individual owner trying to go get a $10 million loan or a $20 million loan on a hotel – that’s a little more challenging,” he said. “The debt funds are a little bit more expensive, and a lot of the banks aren’t really active in that space…It’s the bigger deals that are easier to get done today.”

Host’s Brand said as interest rates come down, private equity players with a lot of dry powder are going to come back into the space and move the transaction needle. “I personally think the question is costs are still elevated. So, can buyers and sellers come to an agreement on valuation and where people are willing to trade?”