How the role of banks is changing hospitality lending

Note: Over the next few weeks, Hotel Investment Today will publish 2025 outlook stories about development, management, deals and finance. Click here for Part 1 on the state of the hotel refinance market in 2025.  Click here for Part 2 on the state of the hotel acquisition market.

NATIONAL REPORT — When Hotel Investment Today talked to eight refinance experts last summer, one of the key insights was how bank lending, from local/regional or institutional, has changed. Bankers were pulling back from traditional spaces they’ve lent in, like hospitality, and deploying their capital differently.

As we’ve talked to hospitality finance experts as part of our look ahead for 2025, they say that banks have been jumping back into the hospitality market for both refinance and acquisition financing, albeit selectively. But they say even if banks aren’t lending the way they were before COVID, their participation in the market is one of the big reasons credit spreads are compressing.

Michael Straw, executive vice president for capital markets for CBRE, said in December that he was seeing more participation from both regional and institutional banks.

Michael Straw

“Both remain the outlier execution when you’re talking about general market participants in the hotel lending space,” he said. “But if you have certain hallmarks of what the banks are really underwriting, which are largely leverage constraints and the desire to see some in-place cash flow, you can create a market around the banks today in a way that you couldn’t, even as recently as earlier this year.”

Straw said even that limited participation makes a big difference.

“Just having the banks participate in the market is, in large part, why you’ve seen so much spread tightening last few months,” he said. “So, hopefully, you see that continue with the regionals. It’s a little bit more binary because they’re somewhat proceeds-constrained, and they’re often recourse lenders, which is just a non-starter for so many borrowers. But you never know when one of those groups just has an appetite for a specific transaction.”

Straw said the notion that banks want to participate in the best deals only (hotels with great cash flow and great sponsors) has some merit.

“Regarding the larger, more institutional deals, I’d say that’s right. For the trophy product or significant in-place cash flow with highly institutional sponsorship, if you start to hit on all these underwriting check boxes, you get the best execution from the banks,” he said.  

Jumping back in

Kevin Davis, Americas CEO for JLL Hotels & Hospitality, noted that banks, broadly speaking, are now at a point where they want to jump back into hospitality lending. But it’s a question of when.

Kevin Davis

“I feel like a lot of the banks have spent the better part of the last several years pruning their balance sheets, and there’s been some runoff of hotel loans, and so now a lot of the banks are taking the position that they need more exposure to hospitality,” he said.

More exposure to hospitality can also present a lower risk rate and better returns than other commercial real estate assets.

“We’re seeing a number of banks go ‘risk-on’ as it relates to hospitality, and we’re seeing more hotel loans being processed by bank lenders (both regional and institutional),” he said.  

Coming back… slowly

Mark Owens, vice chair and hospitality practice group leader for Toronto-based Colliers, said many banks have been out of the market since the collapse of Silicon Valley Bank in March 2023. But they are now coming back—for the right deals.

Mark Owens

“The regionals, I’d say they are coming back. But when you go from very few to less than few, it’s not a massive increase, and that’s something that we’re watching closely,” he said. “The more they come back into the space, the better it is because their costs of capital tend to be lower. But we’re still not anywhere near where we used to be.”

Owens said many institutional banks are also reentering the hospitality market but in a different way.

“The institutional banks are lending selectively, but they’re also doing a lot of more of the leveraged finance and providing back leverage to a lot of the funds,” he said. “They may not be writing a check to [hotel investors], but they may be writing a check to [a fund]. Because they’re providing back leverage, and that’s treated more favorably in today’s market, the debt funds have been able to compress their pricing,” he said.

Owens said he thinks the market will see more banks enter the market after they rebalance their lending portfolios.

“There are a number of lenders that we’ve spoken to that want to be in the hotel space in greater volume but they need to resolve and rebalance some of their portfolios with other asset classes before they can start deploying again,” he said.    

“Regulars” on top of deals

Carlos Rodriguez, Sr., founder, chairman and CEO of Miami-based Driftwood Capital, disagrees with the premise that banks are pulling back from hospitality because he’s had the opposite experience, especially with what he calls the “regulars”—the local/regional banks he regularly works with.

Carlos Rodriguez, Sr.

“The regulars are on top of [deals] big time. I speak with all the regional banks that I deal with on a constant basis and the regulars have been scrutinizing anything that has to do with commercial real estate,” Rodriguez said. “They’re more open to financing new development and to financing, in general, real estate projects versus the larger banks.”

Rodriguez said local/regional and institutional banks are often chasing different kinds of deals.

“Community banks are more active on the development side and they’re more open to development… and quite frankly, I’ve seen community banks becoming more hungry [for deals]… The larger ones are focusing mostly on existing properties (conversions or renovations),” he said.