The pace for deals was slow for most of the year, but with the Fed lowering interest rates, there is an increase expected moving forward. Hotel Business spoke with Russell Frahm, executive director, originations, Mesa West Capital and Christopher Lawton, managing director, head of originations, Nuveen Green Capital, to discuss the year that was and the year to come.
—Gregg Wallis
How has 2024 turned out from your perspective?
Frahm: 2024 was remarkably similar to 2023. Given the economic uncertainty over the past several years, owners and operators of properties that were performing well coming out of the pandemic chose to hold on to their assets and refinance instead of sell. This gave them more runway for pricing and fundamentals to improve.
One of Mesa West’s recent refinancings was a $50-million short-term loan secured by the Thompson Savannah, a 193-key luxury hotel in Savannah, GA, that has been generating impressive growth in the key hospitality metrics including occupancy, RevPAR and ADR over the past two years.
For those properties that did trade, borrowers needed to come in with greater equity on lower leveraged fixed-rate loans. Most of these acquisition loans were funded by traditional lending sources, which generally have a lower return profile for deals with fresh cash equity vs. a refinancing, even with a similar cash flow profile.
Lawton: While the commercial real estate (CRE) industry has faced numerous challenges, 2024 has turned out to be an impressive year for the rapidly expanding C-PACE (Commercial Property Assessed Clean Energy) industry—and for Nuveen Green Capital (NGC), in particular. Despite CRE industry headwinds, we have had our biggest year ever, exceeding $1 billion in originations and closing on several notable hospitality projects, including the first C-PACE financed transaction in New Mexico for a luxury resort, Bishop’s Lodge Hotel in Santa Fe ($76.2 million); as well as sister hotels, the Thompson and tommie Hollywood in Los Angeles (combined total of $90.4 million) and the largest C-PACE transaction in Houston for the Thompson Hotel and Pavilion retail complex ($46.6 million).
Christopher Lawton, Nuveen Green Capital
Have you seen any change in transactions or search for financing since this year’s rate cuts?
Frahm: We have not seen much difference in transaction volume since the rate cut. Rate cuts and the impacts on hospitality are a bit nuanced. While the cuts bring down the costs of borrowing, it could imply some overall weakness in the economy, which will eventually trickle into hospitality. The treasury volatility throughout the year, even in light of the rate-cut projections, could lead to some value uncertainty on a go-forward basis. Stability in the 10-year Treasuries for a consistent period of time should lead to more transaction volume, but where it settles is the biggest question.
Lawton: Over the past 12 months, we have seen a sharp uptick in deal size, with C-PACE taking up a larger portion of the capital stack on many deals, as borrowers, including a growing number of large, institutional commercial owners and developers, seek out C-PACE as an attractive and flexible form of capital.
While this year’s rate cuts have stimulated some investment activity, they are not necessarily the cure-all for the CRE industry’s ills—and we expect some level of volatility and lack of liquidity to continue. While we look forward to the ship steadying, the market distress has helped contribute to the surge in demand for C-PACE. With hotels being our largest asset class, C-PACE’s capital has been particularly attractive to hotel owners and developers—largely due to its ability to recapitalize projects up to three years post-completion.
What do you expect 2025 to look like from a financing and transactions perspective?
Frahm: I would imagine 2025 will be very similar to 2024 from a deal volume standpoint, which should be more heavily weighted to refinancings. Corporate travel has picked up, offsetting some of the softer transient demand in 2024, which I believe will continue with the return to work and travel associated with in-person meetings, conferences, etc. The next few years will see large sporting events across the country, most notably the World Cup in 2026, which will have an impact from both domestic and international travel and may spark some investment sales activity and/or capital investment leading up to it.
Lawton: We expect to see continued growth across all asset classes as C-PACE, now available on a near-national basis in 40 states, plus Washington, DC, continues to receive more mainstream adoption. With C-PACE’s flexibility, we also know that we will continue to pivot and evolve the product as the market shifts. With many banks still on the sidelines, we see an opportunity to gain market share and add new clients that would otherwise be difficult to acquire in a highly liquid market.
Last year, the C-PACE industry surpassed $7 billion in total originations, with NGC maintaining its leadership position, providing 41% of the total industry originations volume in 2023. We expect to see this industry growth continue in 2025 and on, as there is considerable addressable commercial real estate opportunity across the U.S.
