Why hotel refinances are surging this year

Editor’s note: Based on our perception of the increased volume of hotel refinances over the past few months, Hotel Investment Today asked several brokers and debt players about the state of the market. This is part 1 of a recurring series that features JLL’s Kevin Davis and Berkadia’s Jared Kelso.

NATIONAL REPORT — If it seems like there have been more hotel refinance deals over the past few months, hospitality lending experts tell us that perception is correct. They also tell us that the trend isn’t slowing down despite the recent volatility of the financial markets.

Kevin Davis

“Our volume in early 2025 is actually up compared to 2024 because the debt markets improved meaningfully in 2024 into early 2025 as spread compressed and more lenders entered the space,” said Kevin Davis, Americas CEO for JLL Hotels & Hospitality. “As a result, we have a strong financing pipeline. In fact, notwithstanding the market volatility over the past several weeks, we continue to see deep liquidity in the hospitality debt space.”

Jared Kelso, senior managing director for Berkadia’s hotels and hospitality platform in New York City, tells us the same story.

“We are up about 20% year-over-year, with the largest increase in liquidity being for the $75-$150 million loan market as compared to same time last year,” he said.

When asked where interest rates are trending today and where they could be in the next few months, Davis said that answer is more difficult.

“That’s a tough question to answer because all-in interest rates include two components which sometimes move in different directions: the index, which is SOFR or treasuries, and the credit spread. The sum of these components equals the loan coupon. Over the last several weeks, we’ve seen credit spreads increase by 0-30 bps for balance sheet lenders and the fixed-rate index,” he said. “Treasuries have fluctuated up and down, while the floating rate index SOFR has remained constant.

Jared Kelso

“In short, fixed and floating rates are slightly higher today, largely due to credit spread increases, but we could easily see the indices move down, which could offset the increase in credit spreads. The current volatility makes it difficult to predict where loan coupons will land.”

Kelso said that given the volatility over the past three weeks, debt fund/private credit spreads have widened about 25-35 basis points, but he is hopeful that spread will compress in the future. 

“We expect this to be relatively temporary, as the credit markets are likely to settle before the equity markets,” he said. “There remains an unprecedented amount of private credit capital available for hotel financing.”

Hotel Investment Today asked Davis and Kelso about what a typical debt stack looks like right now, the biggest reasons they see for refinances and who is lending in 2025.

We are up about 20% year-over-year, with the largest increase in liquidity being for the $75-$150 million loan market as compared to same time last year.

Jared Kelso

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Hotel Investment Today (HIT): What does the typical debt stack look like today on refinances?

Kevin Davis: The typical debt stack is approximately 60% to 65% LTV/LTC and may be a mortgage only or sometimes will include a mortgage and mezzanine loan. There are also capital structures with more leverage, and you can see mortgage/mezz combinations down to 75% LTV. Below that leverage point, you will sometimes see preferred equity to 85% to 90% LTV.

Jared Kelso: Senior lenders are generally willing to do up to 65%, with a wide range of private credit lenders willing to do 70% to 75%. Banks are generally topping out at 55% leverage.

HIT: What are the biggest reasons refi deals fail?

Davis: We aren’t seeing a lot of refinancings fail, given how much liquidity there is in the debt space. It’s the old adage of ‘no bad bonds, just bad pricing.’ In other words, we see liquidity for all types of refinancing; however, for tougher deals with limited cash flow and in challenging markets, there may be a debt bid, but the ownership may not like the pricing. The liquidity is there; it’s often a question of pricing.

Kelso: Generally, there is plenty of liquidity for loans with at least a 10% debt-yield on in-place cash flow with a compelling business plan. That said, the overall cost of short-term, low-debt yield bridge debt is forcing a number of owners to consider a sale, as limited to no [cash flow available for debt service] CFADS is forcing them to rethink the benefit of continuing to hold absent a catalyst for near-term cash flow growth. Further, a number of lenders prefer to see cash-in refinancings for transitional refinancings.

All of the lender types are active right now, including banks, debt funds, life insurance companies and CMBS, although we’ve noticed a relative increase in bank activity. We expect that all of these lender types will continue to be active in 2025, with the balance sheet lenders’ pricing being a bit more stable... while CMBS pricing will be more volatile.

Kevin Davis

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HIT: What is the main reason for most of the refis you are seeing?

Davis: The refinancings are driven by a multitude of reasons that are generally asset specific. In some cases, the existing debt is maturing, and ownership needs to replace it with a new loan. In other cases, the asset has ramped up and ownership would like to cash out. In those instances, ownership may also be looking to replace the existing debt with lower coupon debt.

Kelso: Debt maturities and limited appetite to continue extending.

HIT: Can you offer an example of a typical (or atypical) deal with rate structure/terms for a recently closed refi?

Davis: A typical deal is a 65% LTV floating loan with a 10% trailing debt yield, pricing in the low-to-mid 300s with a five-year of fully extended term and a 50-100 bps (basis points) origination fee, non-recourse.

Kelso: S+ (floating rate loan using SOFR as the base rate) 385 bps, 8% debt yield acquisition and renovation loan.

HIT: What entities are most active in the debt market right now? Are there any trends in who will provide more capital in 2025? 

Davis: All of the lender types are active right now, including banks, debt funds, life insurance companies and CMBS, although we’ve noticed a relative increase in bank activity. We expect that all of these lender types will continue to be active in 2025, with the balance sheet lenders’ pricing being a bit more stable (banks, life insurance companies and debt funds), while CMBS pricing will be more volatile. That’s the trend that we’ve seen over the past several weeks and that we expect to continue for the foreseeable future.

Kelso: Private credit is by far the most active. Regional and national money center banks have started to lend again, albeit to a smaller roster of banking relationships. The CMBS market has been healthy and active in Q1. However, it has become more volatile in the past few weeks. This market requires relatively steady benchmark rates to function at full capacity, and the see sawing of treasuries has caused a number of CMBS lenders to pump the brakes for a short period to better understand the direction of the market.