Why experts are optimistic about 2025 refi market

Note: Over the next few weeks, Hotel Investment Today will publish 2025 outlook stories about development, management, deals and finance.

NATIONAL REPORT — With interest rate cuts in the second half of 2024, borrowers might think that can only lead to better refinance opportunities. But the answer is a lot more complicated, according to Arriba Capital's Ryan Bosch.

“I’m getting calls every day from borrowers, especially on the smaller scale,” said Bosch, principal for Scottsdale, Arizona-based Arriba Capital. “[They’re saying] the Fed is dropping rates. So, how’s that impacting my upcoming refinance?”

Bosch said he then has to walk his clients through what’s happening concurrently in the treasury market, which potentially could mean bad news.

“There’s a lot of investors out there on the hotel side that maybe aren’t as sophisticated, that aren’t really tracking that as well,” he said. “My answer could be that it’s actually in a worse position now.”

Bosch mentioned a previous interest rate cut when he had to tell clients, “Since the Fed went in and dropped rates 25 basis points on the perm financing, market spreads have widened and the treasuries have popped. So you’re actually in a worse position in those types of scenarios than we were before the Fed did their drop. I’m explaining that a lot every day.”

Hotel refinance experts offered a wide range of views on various aspects of the market as 2025 begins, but there were a few commonalities in their answers: most expect an uptick in hotel refinancing in 2025 (and their Q1 pipelines reflect that sentiment) as multiple rate cuts have compressed spreads, and most are hearing optimism from their clients about what the new year can bring in terms of financing.

Bosch said he expects the volume of deals to be solid in 2025, especially because of the wall of maturities that are coming due.

“I think we have about double the maturities [in 2025] than what we had [in 2024],” he said. “We’re going to see a big spur of refinancing activity just because of that, and we’re also going to see quite a bit of acquisition activity spurred by those maturities.”

SASB CMBS refis strong

Kevin Davis, Americas CEO for JLL Hotels & Hospitality, said the refinance market is incredibly strong right now, especially for SASB CMBS (single-asset, single-borrower, commercial mortgage-backed securities) deals.

“Over the course of the fall, spreads came in pretty materially,” he said. “We’ve seen the index come in, and we’ve also seen a continued reduction in credit spreads, particularly for balance sheet lenders… This has been just an incredibly robust year for financings.”

Davis said JLL’s refinance pipeline has picked up over the course of the fall.

“For a lot of clients, there’s an opportunity to refinance maturing CMBS,” he said. “We have a number of balance sheet deals that we’re working on with really high-quality assets, and people want to take advantage of credit spreads.”

There has been a relative absence of deals getting done in the $50-$250 million range, Davis said, while deals above and below those thresholds have been active. For 2025, Davis said the “donut hole” of those $50-$250 million deals is also starting to fill in.

“That being said, there are also smaller deals,” he said. “We have a very active select-service pipeline of smaller transactions, and we also have a number of deals over $250 million. I’d say it’s probably perhaps more evenly split today than it was previously, but a significant number between $50-$250 [million].”

Great deals for best assets

Jared Kelso, senior managing director for Berkadia’s hotels and hospitality platform in New York City, said the refinance market is considerably stronger today, especially for the best assets and sponsors in single-asset deals.

 

“There’s no question the market is really compressing for best-in-class assets and best-in-class sponsors,” he said. “The benefit of the rate compression is there’s an outsized benefit on a small pool of assets if you’re of a certain size and a certain profile that lenders want right now.”

Kelso said the benefits felt over the past few months have benefited more stabilized assets more than they have more traditional assets, but he also thinks there will be a halo effect.  

“There’s more liquidity in the market and more competition for stabilized assets, which is, in turn, going to drive, over time, more compression for bridge financing,” he said.

Overall optimism

Michael Straw, executive vice president for capital markets for CBRE, said the refi market has undergone many changes in the last six months.

“A lot of that has been spurred by overall optimism in the capital markets, not just real estate debt capital markets, but the equity capital market as well, and ongoing rate cuts, which signal less distress on commercial real estate as a whole,” he said. “Hotels have just the beneficiary of that because of their unique ability to digest what are still elevated interest rates… There’s been ongoing increased lender appetite for new origination because there’s a good opportunity here to get a good risk-adjusted yield.”

Straw said he thinks there will be a continued uptick in refi activity in 2025.

“The loan maturity schedule is probably continuing to accelerate into 2025 and there’s a lot of larger CMBS transactions that are also maturing,” he said. “A lot of the closely followed SASB market should experience ongoing maturity, which will be more event-driven refi, but you’re also going to see a lot of opportunistic refi as well because there’s post-COVID vintage assets that were probably financed in the early stages of their ramp cycle that are now cash flowing, and there’s probably great opportunities to pursue a cash-out refi while also lowering interest rate expense.”