As part of the Americas
Lodging Investment Summit’s Patron sponsorship program, ALIS organizers asked
Access Point Financial’s eight timely questions as we prepare for the 22nd
annual event January 23-25, 2023, at the JW Marriott/Ritz-Carlton Los Angeles
L.A. LIVE. Following are his responses.
ALIS:
How has
inflation and the threat of a recession affected the U.S. hotel lending
environment?
LIPSON:
Yes –
rates have obviously risen with the Feds actions, though spreads have only
risen modestly. Significant re-trading on assets have occurred and deal
timelines are extending. The market is just adjusting and absorbing the higher
rate environment. However, hotel performance continues to remain strong, but
hoteliers are feeling the pressures of the higher rates, tight labor markets
and broken supply chain. While the industry is functioning, participants are
moving cautiously.
ALIS:
Most
forecasts show supply growth checking in at about 1% each year for the next two
or three years. How do you see it playing out based on Access Point’s lending
pipeline?
LIPSON:
Supply
growth will be impacted to the negative. A tough time to be developing hotels –
higher labor and materials costs, rising rates are all negatives to a hotel
project. However, some markets are thriving and in much need of new supply. We
see top notch developers reaping the benefits of this environment. If you don’t
know hotels or are new to development – this is definitely not your market. Experience
is critical going forward.
Also,
we are starting to see brands actively engage in capital discussion to help
stimulate hotel development. Brand money to support projects will be a critical
piece of the development puzzle. Borrowers can’t go it alone – the brands need
to help with incentives, key money, equity, sub-debt. We are having those
conversations.
ALIS:
What’s
the message to hotel owners, investors, and developers from the lending
community in general as 2023 approaches?
LIPSON:
The economy
has changed for the foreseeable future. Capital markets are tighter, rates will
be higher, growth will be slower, the labor market will continue to be
challenged and the supply chains will be in flux. But with this being said,
people are traveling. Young people, retirees, groups and business travel is
robust. Travel patterns, however, will be different from the past. For example,
in certain markets Thursdays and Sundays may be stronger than they were
pre-pandemic due to flexible work dynamics allowing for the melding of business
and leisure travel. Projects need to underwrite to these new headwinds.
ALIS:
How has
the capital stack changed as a result of the pandemic, and is that change
permanent?
LIPSON: Lower LTVs, need for
interest reserves, flight to quality brands and sponsors - all the conservatism
you’d expect. The industry is just in that part of the cycle. All those items
were easing the further away we got from the pandemic… however, with the Fed’s
actions and potential economic slowdown the conservatism continues to linger. So,
is this permanent? No, just cyclical.
ALIS: Based on your loan portfolio
and what you’re seeing throughout the industry, what segments are performing
best, and what segments will lead expansion efforts? Why?
LIPSON: Sunbelt. Secondary
markets, extended stay, “compact full-service” (as hotels redefine their
service offerings). We continue to originate bread-and-butter limited and
select service loans for premium brands. At the end of the day – its location
and brand.
ALIS: What’s the most
frequently asked question you receive from clients, and how do you answer?
LIPSON: Clients ask for spreads in the 4s! I answer… No! but
seriously, the market isn’t there right now. Capital markets are getting
tighter… this isn’t going to play out the same way it did post-great recession.
We are in a new paradigm with the Feds actions and shocks to the labor markets.
ALIS: What’s the most under-estimated challenge the hotel industry
faces, and why?
LIPSON: Over saturation of hotels brands. Marriott has 30; Hilton has
20 something! What will this mean for the customer, the franchisee and the lender?
Still to be determined.
ALIS: What’s the most under-estimated opportunity for the hotel
industry, and why?
LIPSON: PIP financing! Aging assets that just suffered
through a pandemic. Brands interested in increasing the guest experience. Assets
will need capital for these “required improvements” Borrowers are still in
recovery mode and will need capital for these projects.