To say this has been an interesting year in hotel transactions is an understatement. The industry waited a long time for the Federal Reserve to make a move on interest rates and it finally came in September with a 50-bps drop. Hotel Business spoke with Mike Armstrong, principal/head of capital markets, HREC; Ryan Bosch, principal at Arriba Capital; and Jared Schlosser, EVP, Hotel Lending & CPACE, Peachtree Group, to get their takes on the year so far and what the interest rate drop could mean for transactions.
—Gregg Wallis
How has 2024 been so far from a financing perspective?
Armstrong: It’s been a good year so far with a wide variety of lenders showing a strong appetite for hotels. The refinancing market has been robust with CMBS making a strong comeback. Year-to-date (YTD) 2024 CMBS volume is up almost 300% from 2023 YTD. Construction lending remains difficult given high rates and construction costs, as well as the 2023 pullback from banks.
Bosch: Financing activity in 2024 has been relatively muted, with many investors adopting a wait-and-see approach for new acquisitions and refinancing. Capital markets remain liquid for those facing maturities, though rates are elevated. Regional banks have pulled back considerably compared to previous years. On a positive note, CMBS issuance has risen, with full-term I/O structures becoming the norm and increased investor demand for 5-year bonds. Life insurance companies have also been active, with more capital allocated to hospitality. Additionally, increased competition in private credit has driven down spreads, reducing the cost of debt fund financing.
Ryan Bosch, Arriba Capital
Schlosser: Peachtree Group’s credit team has surpassed $1 billion in credit transactions year-to-date, marking a major milestone and setting a new benchmark for the firm’s performance this early in the year. In particular, our hotel lending platform has surpassed $836 million, marking a 58% increase compared to the same period last year.
With trillions of dollars in loan maturities between now and 2026, and banks facing tighter constraints, private credit lenders like Peachtree Group are stepping in to bridge the financing gap. We are offering more adaptable and competitive lending options to commercial real estate operators and developers who once relied heavily on banks. This shift is enabling private lenders to capture a larger share of the market. We project nearing $2 billion in credit transactions this year, with sustained growth expected through 2025.
After many hints, the Fed cut the interest rates by half a point. How do you think this will affect the industry for the rest of the year?
Armstrong: The 50-bps rate cut and the strong indication that additional cuts will follow sends a powerful positive message to hotel owners, investors, developers and lenders. There are many factors that affect the hospitality industry, but a lower interest rate environment will certainly stimulate financing and investment activity for the remainder of the year. With more cuts on the horizon, we should have a significant increase in transactions and financing in 2025.
Bosch: The recent 50-bps rate cut is likely the catalyst that will spark the next liquidity cycle. While it may take a quarter or two for the effects to fully settle, we’re already noticing an uptick in financing activity, as many clients had been waiting to see the Fed’s direction. We anticipate a gradual increase in activity through the remainder of the year, with a more significant acceleration expected in the first half of 2025 as confidence in the new market conditions grows.
Schlosser: If the Fed continues to lower interest rates, it will likely have a significant impact on the hotel transaction market. As interest rates decline, borrowing costs for buyers will decrease, making it easier for investors to finance hotel acquisitions. This reduction in financing costs could drive more transactions, especially as many hotel owners face upcoming debt maturities and may need to sell assets to manage liquidity or pay down other loans. Lower rates could also encourage hotel operators and developers to refinance existing loans, potentially fueling a surge in deals as more assets come to market. Furthermore, the combination of debt maturities and lower interest rates could accelerate sales activity towards the end of this year and into next year.
While debt maturities will force some groups to sell, lower rates will create a more favorable environment for buyers, leading to increased market liquidity and transaction volume. Overall, a declining interest rate environment is expected to drive significant growth in hotel transactions as we approach 2025.
Jared Schlosser, Peachtree Group
What are the types of loans hoteliers are gravitating toward?
Armstrong: Commercial banks are providing favorable financing terms for local and regional owner/operators, typically with recourse and depository requirements. Debt funds are doing larger value-add deals and CMBS is available for hotels with strong in-place cash flow.
Bosch: Recently, our clients have shown a preference for shorter-term deals with low prepayment penalties in their permanent financing. The strategy is to maintain flexibility, anticipating rate cuts in the next 18-36 months that will allow for refinancing with minimal costs. For recapitalizations, CMBS has become the go-to option, especially for investors seeking cash-out proceeds. Banks and credit unions have been offering the most competitive coupon rates. For ground-up developments, properties financing PIPs or those pursuing value-add strategies, debt funds remain the primary source of capital.
Schlosser: A major shift has been the increasing demand for greater flexibility in loan structures. Borrowers are favoring bridge loans with lower interest rates and prepayment options, enabling them to refinance into long-term financing as the exception is interest rates will continue to drop.
