Industry leaders weigh in on how the failure of a few U.S. regional
banks will impact the availability of debt to make and close deals.
NATIONAL REPORT – What is the impact of recent U.S. bank collapses on hotel development
and M&A, especially for an industry that for so long has worked with
regional and local banks to obtain debt? If anything, for developer or
investors under agreement or underwriting a deal and working with regional
banks most affected by downward pricing in the market there may be some cause
for concern about getting a deal over the finish line, according to experts
canvassed in the past few days.
This will reduce lending capacity of the regional banks, which provide financing for a wide range of businesses, including hotel transactions.
Lee Pillsbury
“The SVB (Silicon Valley Bank)
failure has already seen funds moving from regional banks to the large ‘too big
to fail’ banks,” said Lee Pillsbury, managing director, Thayer Ventures,
and chairman TLG Investment Partners. “This
will reduce lending capacity of the regional banks, which provide financing for
a wide range of businesses, including hotel transactions.”
Pillsbury added that the bank
challenges will also see a likely tightening of credit requirements and loan
covenants. “It is too soon to tell how big a shift will occur but as is
always the case, the strong get stronger and the weak fail,” he said. “Combined
with the ‘risk off’ current environment, we should expect a decline in the
number of transactions at least in the near term.”
Echoing Pillsbury comments was Michael Bellisario, analyst
with R.W. Baird. “The potential impacts relate to the financing of assets… Banks
could pull back on new loan issuance over the near term given all the
uncertainty and capital markets volatility, which could negatively impact hotel
transactions and real estate values (i.e., impact to the REITs) and new construction
starts (i.e., impact to the brands).”
Lenders could become incrementally more hesitant to lend on projects in San Francisco, for example, or other tech/venture heavy markets until more clarity emerges.
Michael Bellisario
For brands and REITs, Bellisario said the banking crisis
should have no direct or immediate financial impact. However, he did add
that “lenders could become incrementally more hesitant to lend on projects in
San Francisco, for example, or other tech/venture heavy markets until more
clarity emerges.”
For now, banks are focused on two things, said Greg Porter,
managing director, capital markets, mortgage brokerage at HREC Investment
Advisors, San Diego, California: maintaining deposits – ensuring clients their
funds are safe – no need to withdraw; and growing deposits – calling potential
clients to convince them to move their money from weaker banks to theirs.
“Regulatory scrutiny just got cranked up a few notches –
focus for the time being seems to be shoring up the balance sheet, defending/adding
to deposits,” Porter said.
At the end of the day, Porter added, “this is a risk-off
environment that could put a further chill on CRE lending amongst the banks.”
But even before the recent collapse of Silicon Valley Bank
and the subsequent Federal takeover of Signature Bank in New York, lending for
hotel deals was challenged. So, naturally, this new situation will not help the
lodging industry return to a more normalized lending/borrowing and trading
market, according to Evan Weiss, co-founder, chief operating officer and
principal at LW Hospitality Advisors, New York City. “That said, the Fed is
still likely to hike interest rates by 25 bps, 25 bps lower than the discussed
50 bps hike they had been considering, but still surprising to some in the face
of these collapses,” he said.
What happened last week has very few similarities to the crisis of 2008 and we see no reason to adjust our long-term outlook with respect to travel tech and the accommodations community.
Chris Hemmeter
Ultimately, Weiss said there doesn’t seem to be a high
correlation with these collapses and borrowing/transacting in the lodging
market. “Seemingly most lodging companies, large and small, have not been
adversely affected by these failures,” he said.
The larger question, Weiss added, is whether these failures
are a “Black Swan” event or the beginning of a larger trend in the downward
movement of the overall economy? “For that, we will have to ask folks way
smarter than I, but for now, while these events certainly are not helpful, they
don’t appear to have a significant adverse direct effect on lodging more than
any other real estate asset class,” Weiss said.
Weiss concluded that lending will likely continue to be
expensive, construction financing will continue to be scarce and/or highly
priced, and hoteliers on most transactions will look for top dollar given their
strong operational performances over the past 24 months or so, and only
transact below expectations if entirely necessary due to some form of internal
financial event.
And despite this evolving banking crisis, Thayer Ventures
Managing Director Chris Hemmeter sees no reason to adjust his long-term outlook
for the hotel business. “The fall
of Silicon Valley Bank is a unique case, concentrated deposit base and a
balance sheet left exposed to rising interest rates, and is unlikely to trigger
a broad-based banking crisis,” he said. “Further, travel dynamics remain
strong, and the interest in innovative startups that promise to drive
productivity and enable new and creative supplier strategies will remain robust.
What happened last week has very few similarities to the crisis of 2008 and we
see no reason to adjust our long-term outlook with respect to travel tech and
the accommodations community.”