NEW YORK — Members of the Industry Real Estate Financing Advisory Council said they believe banks scaling back on being hotel lenders is more than a short-term phenomenon, but there are signs that new players could enter the space and help ease the financing crunch many developers and investors are feeling.
Speaking during the “Financially Speaking: IREFAC Insiders” session at the NYU International Hospitality Industry Investment Conference, Christopher Jordan, managing director and head of specialty real estate finance for Wells Fargo Corporate and Investment Banking, said the regulatory environment is making lending for hotels more difficult for more banks, and that isn’t slated to change.
He said high interest rates and “mounting risk aversion” are a big part of what’s going on with banks, but they’re not the biggest issue.
“The biggest drive, in my opinion, is you have a capital and regulatory framework that’s very restrictive and very punitive, particularly for commercial real estate,” Jordan said. “That’s a longer conversation and it’s complicated, but it’s really the culmination of 12 years of a regulatory shift and post-financial crisis to a world requiring a lot more capital. The capital requirements for large banks, and soon to be the regional banks, are much, much higher than they’ve ever been. They’ve continued to creep up. This has been a slow process.”
He said the shift within banks, now both large and small, is not likely to go back.
“There no way that’s going to change in our lifetime, in my view,” he said. “So the banking system will not be able to supply as much capital. So it’s going to be a continued shift to private credit, and of course, the CMBS market, which is beginning to function better but has a ways to go to get back to full health.”
Along those lines, KSL Capital Partners co-founder and CEO Eric Resnick said his company’s lending platform has been one of the beneficiaries of that shift as it seeks to offer an alternative to a sale for owners with upcoming debt maturities.
“It’s going to cost more, but we have the flexibility to come in and provide, whether it’s a cash-flowing loan or a [property improvement plan] loan or whatever it might be,” he said. “We like to specialize in those transitional assets that have a story or fund some of those capital projects that we agree have some of the best ROI.”
Resnick said it’s good for the industry to have different lenders that offer different kinds of solutions.
“CMBS coming back is really important,” he said. “It works for performing assets, but it doesn’t work for heavy [capital expenditures] and it doesn’t work for transitional assets, right? So we can come up with a solution there and others can, too. It’s not just about us. It’s about coming up with a hybrid structure, right now.”
Gilda Perez-Alvarado, global CEO of JLL Hotels & Hospitality, said large international investors are looking to get in to the hotel lending game, and platforms like KSL’s seem to be the play.
“They’re enamored by this credit story, and they know that something’s got to give with debt maturities, CapEx needs, so on and so forth,” she said. “And they know the way to play it as opposed to coming in directly is investing in credit funds.”
Brand executives agreed that the market will continue to find ways to fund deals and development even if the landscape changes.
“It’d be silly to say it’s not going to have an impact on us,” said Kevin Jacobs, chief financial officer and president of global development for Hilton. “Of course, our developers function in those same markets, but what I think it means is there will be a flight to quality property.”
Jacobs said more and more that will mean lenders will favor projects with “the best sponsorship” and “the best brands.”
Leeny Oberg, chief financial officer and executive vice president of development at Marriott International, agreed on the long-term view but added this ultimately adds up in the short term to muted supply growth, which supports operating fundamentals at a time some worry that demand could soften.
“You’re really looking at the reality of a number of years of lower-than-average supply growth,” she said. “So it’s not just one year. It’s not just two years. It’s easily going to be maybe six years, particularly in the U.S. and then in some places outside the U.S., as well. And you don’t catch up from that. It’s not like you’re going to kind of jump back with one year where supply growth is 7%.”
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