Hotel
finance experts tell us we are close to a “normalized rate environment,” and
they don’t expect much change in the next few years.
Note: Over
the past few weeks, Hotel Investment Today has published 2025 outlook stories
about development, 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. Click here
for Part 3 on the changing role of banking in hospitality. Click here
for Part 4 on the potential deregulation.
NATIONAL
REPORT—With all the volatility of the Fed’s interest rate increases in the past
few years, there is an expectation and optimism that stability will benefit the
market.
Kevin Davis,
Americas CEO for JLL Hotels & Hospitality, said the market is pretty close
now to as “normal” a rate environment that the hotel industry has seen in quite
some time, even if interest rates are higher than they were in the period
between the Great Recession through the beginning of COVID.
“We’re
talking almost 200 basis points of rate reductions of all-in cost of debt
reduction since the beginning of [2024],” he said. “Soon enough, we’ll start
moving into a zone where we are in what I would call more of a normalized rate
environment (i.e. 6% to 6.5%) all-in coupons, which is where hotel debt has
historically priced.”
Davis said
the 3% to 5% cost of hotel debt that the market saw over most of the last 15 years
was anomalous.
“That’s not
the norm. Historically, if you go back, hotel debt was typically priced with a
six handle, and we’re quickly moving back to that zone, certainly on fixed-rate
deals. We’re seeing six handle all-in coupons on floating-rate deals,” he said.
“We’re not quite there for most deals, but over the next six to nine months, as
spreads continue to compress and hopefully we get additional rate cuts from the
Fed, we’ll see all-in coupon squarely in that six-handle range.”
Hotel
Investment Today spoke to several hotel finance experts about what they expect
for the new year. Several of them said the conditions in 2025 are probably what
the market will be like over the next few years.
Lack of
volatility
Ryan Bosch,
principal for Scottsdale, Arizona-based Arriba Capital, said while treasuries
will continue to be on the uptake for a while, it shouldn’t be a big jump.
“No one is
pricing in that we will be in a lower interest-rate environment in 2025 for
permanent debt. We don’t see the needle moving there,” he said. “But the good
thing is, the hope is, there’s not going to be the volatility in interest
rates that there was in the last 24 months and that we get to more of a status
quo.”
Bosch said
that stability would be welcome.
“When people
have certainty or more certainty, that interest rates are going to fall within
a certain range, it’s going to help spur investment activity,” he said.
Michael
Straw, executive vice president for capital markets for CBRE, said he thinks
there will be more secured overnight financing rate (SOFR) cuts.
“You’ll
definitely see more SOFR cuts. The benchmark will come in… If you remove what
happens to SOFR, and you talk about credit spreads, we’ve seen a lot of
tightening in the last six months,” he said. “How much more can the market
digest regarding tightening? It is kind of TBD. We have seen an uptick in bank
originations and that’s also impacting ongoing spread tightening.”
Straw said
he’s seeing two-handle spreads in the market for cash-flowing opportunities for
the first time in a while.
“That would
indicate that we still do have some room to run in terms of ongoing spread
tightening,” he said. “But so much of that has already occurred in the last
several months that you probably don’t see the same level of acceleration in
the next six months as you had in the last six.”
Construction
financing
Another
persistent issue continuing into 2025 for hospitality finance is the lack of
available construction financing.
Mark Owens,
vice chair and hospitality practice group leader for Toronto-based Colliers,
said the biggest problem is making the deals work in the current environment.
“We continue
to look at the high cost of capital on the development side and the lack of
that available capital,” he said. “Whether it’s the regional banks that do some
of the smaller ground-up deals, or even the larger institutions that do some of
the larger deals, it’s very hard to get construction financing.”
Owens said
Colliers has historically done a lot of large construction deals, but not
currently.
“That’s
generally where we like to play because your sponsors are better capitalized,
and the transaction generally has various factors that make it work,” he said.
“For a variety of reasons, we’ve looked and seen a lot of construction come
across our desk and we’ve politely declined on basically all of it at this
stage because the math doesn’t quite work yet.”
Carlos
Rodriguez, Sr., founder, chairman and CEO of Miami-based Driftwood Capital,
said construction financing will continue to be a challenge except in very
specific circumstances.
“We have a
very healthy development pipeline… But I can tell you that for every 20 or 30
deals that we look at, only one pencils and the only reason that it pencils is
because it’s in a high-barrier-to-entry market, or it’s in a very strong
growing market and it has specific reasons for it to pencil.”
Rodriguez
said the combination of more difficult financing, higher interest rates, and
continuing rising construction costs has created a difficult market.
“Maybe it’s
improving a little bit, but we’re not anywhere near back to normal. We’re at
least 50% below normal, at least in hotels,” he said.