What hotel investors need to consider when evaluating lenders

A recent mid-year outlook from CBRE found that 55 of 65 hotel markets in the U.S. have seen their RevPAR return to 2019 levels. According to the same data, this momentum should continue to build as forecasted RevPAR growth reaches 3.8% in 2024. Several factors will support this trend, including improved long-haul capacity among airlines, increased business travel, and faster Asia-Pacific visa issuance.

Despite these forecasts, data from the LW Hospitality Advisors (LWHA) Major U.S. Hotel Sales Survey shows that Q2 2023 transactions are down from Q1. While the number of trades was nearly flat between the two periods, the total dollar volume decreased by about 11% as the sale price per room dropped roughly 8.5%.

In other words, RevPAR is rising, yet deal volume is down. These two data sets contradict each other because a growing market should support growing deal volume. A closer look at the data suggests one possible explanation for this disconnect: many attractive deals are still available but becoming more challenging to identify and transact on. For example, many trades in the first half of 2023 were either in high-barrier markets with strong cash flow or underperforming assets needing capital. These deals were at opposite ends of the market.

Investors who want to identify and capitalize on these opportunities need to ask three questions to help determine if a lender will make a suitable partner.

Does the lender have a deep understanding of market trends?

Nearly everyone has access to the same numbers in an era of democratized information, but the numbers alone do not tell a story. Investors and lenders need an understanding of market trends to draw a line through the figures and make sense of the market.

The ability to read the trend has never been more important because today, the market is changing fast as interest rates rise. For the majority of the last 15 years, capital has been very cheap. That era has ended. Daniel Lesser, CEO of LWHA, recently remarked that these low rates were “an anomaly that we’re probably not going to see again in our lifetimes.” 

Higher rates mean that investors and lenders must account for the adjusted returns that come with a higher cost of capital.

When lenders deeply understand the market, they know when to expect the bid-ask spread to narrow. They know when to expect the current glut of sideline capital to be deployed. They know where to find good opportunities among properties with deferred renovation and maintenance costs.

Will the lender have the ability to move fast?

Acquisition opportunities remain limited. Therefore, buyers who can execute transactions fast with all cash/equity offers have an advantage. Lenders with the capital and drive to move quickly can empower investors to make these rapid moves.

Speed will also be necessary when interest rates begin to fall. While the timing of rate cuts remains unclear, many investors and lenders know that when rates drop and financing becomes more accessible, a flurry of transactions will likely lead to further competition. Today, the all-in financing costs of +/- 11% (construction and bridge) are less attractive than overall capitalization rates of about 7% to 8% for many hotel assets. However, even modest rate cuts could meaningfully change that picture.

Does the lender's business structure fit your growth strategy?

In a market characterized by high interest rates, rising competition, and COVID after-shocks, investors need more than a source of capital. They need a lender who can offer a straightforward reading of market trends, the ability to handle new challenges, and the agility to move when opportunities surface.

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Opting for lenders that align with the specific needs and aspirations of the hotel business is essential for achieving sustainable expansion. For the ones that still have access to bank pricing for transitional assets, can the lender maintain execution and leverage, or do they require mezz of preferred equity to complete the capital stack? Have their lending limits been affected either by asset class or by the borrower? Many “rinse and repeat” borrowers leverage private credit for programmatic deals. Do these lenders still have available capital sources or investors to continue funding in the long haul? Will that pricing change in response to fluctuations in the spreads?

In the dynamic hospitality industry, where market conditions can fluctuate, hotel owners must collaborate with private credit lenders who understand the intricacies of the sector. Moreover, choosing lenders with a proven track record of supporting franchise businesses within the hotel sector enhances the likelihood of a successful partnership.

In a market characterized by high interest rates, rising competition, and COVID after-shocks, investors need more than a source of capital. They need a lender who can offer a straightforward reading of market trends, the ability to handle new challenges, and the agility to move when opportunities surface.

Shivan Perera is a business development officer at AVANA Capital, specializing in CRE lending, risk management and marketing to the commercial real estate community.

Note: The views and opinions expressed in this column do not necessarily reflect the opinions of Hotel Investment Today or Northstar Travel Group and its affiliated companies.