With concerns about interest rates and inflation, this year was certainly one that will be long remembered. Hotel Business caught up with Don Braun, president, HALL Structured Finance; James M. Reivitis, managing director, head of business development, Access Point Financial; Harry G. Spirides, president, Spirides Hospitality Finance Company LLC; and Beau Williams, senior managing director, Cronheim Hotel Capital, to get their takes on the year that was and the one ahead.
—Gregg Wallis
James M. Reivitis Access Point Financial
There were a lot of questions coming into the year as to how it would go. What was 2023 like from your perspective?
Braun: For us, 2023 was a very active year in terms of new loan originations in the hospitality sector. With banks and other institutional capital providers mostly on the sidelines, we saw an increasing number of attractive opportunities that we were able to execute on.
Reivitis: We were very active and have noticed things picking up in the fourth quarter as sponsors are getting off the sidelines because of opportunity or necessity. But it was challenging for sure, and there was a lot of wait-and-see for those that had the option.
Spirides: 2023 has been disappointing. As the Federal Reserve has continued hiking interest rates for most of this year, transaction volumes, especially with new hotel construction financings, have been going down proportionately inversely at 35% year-over-year (YOY). A large amount of planned new hotel development projects are no longer financially feasible at these interest rates. Most forecast profit margins will now be spent on rising interest expense and rising property insurance premiums. Hotel acquisition financing and hotel debt refinance transaction volume is down less dramatically at 15% YOY. Hotel owners who have SBA 7(a) floating interest rate mortgages are desperately attempting to refinance into fixed interest rate loan products as their effective interest rates are now around 10%-12% and possibly going higher. Additionally, in many locations across the Southeast U.S., property insurance premiums have gone up at an astonishing 200%-300% YOY.
Williams: 2023 from our perspective was a good year production-wise. Obviously, the headline news might indicate differently, but we had a very successful year. I believe overall for most groups though, including lenders, it was a very strange year. CMBS was very slow, and the majority of boutique bridge lenders had a slow year as well. Depending on investment strategy, the timing of those investments really played a part on the amount of flow companies would have. For example, if you are a family office acquiring hotels, it was most likely a slow year or even one where nothing was acquired. If you were a fund with the obligation to find deals and a necessity to put out money, it was very difficult, but we saw clients still very active given the competition in that space dwindled.
Don Braun HALL Structured Finance
How have high interest rates affected the lending environment?
Braun: Clearly, high interest rates are impacting owners and transactions. However, I think developers are smart to battle though some of the current interest rate headwinds to move their projects forward and deliver new high-quality projects in two or three years. This will be when new supply will almost certainly be way down; interest rates may be on a downward trajectory; and we’ll be in a post-election economy, which is generally a positive.
Reivitis: It’s challenging for obvious reasons, but deals are getting done, and we are one of the most active in the market, even for larger deals and preferred-equity transactions, which many sponsors may not know us for. Expectations between sponsors and lenders are starting to normalize a bit as the industry settles in with the new normal. I think sponsors need to be casting a wide net and be open to what the lenders are telling them and working together towards solutions.
Spirides: See my previous answer.
Williams: They certainly have impacted everyone, from developers, funds for acquisitions and even asset managers. The higher rates are straining debt service coverage, which impacts property cash flows and the overall ability to refinance, make sense of acquiring an asset or cover the current mortgage payments. Obviously if you borrowed prior to rates going up on a fixed rate, this doesn’t apply to you.
From our perspective, we have seen this impact lenders given the underwriting and overall qualifications for borrowing are much more difficult with the high rates straining debt service coverage ratios and debt yields. Some folks are getting creative in their ability to lend or giving borrowers grace periods on covenants, but it certainly is not an easy market right now.
Harry G. Spirides Spirides Hospitality Finance Company LLC
What does 2024 look like from a financing perspective?
Braun: We see 2024 playing out much like 2023. In fact, we think there will be even more opportunities for both bridge loans and new-construction loans. We intend to be a very active lender to the hospitality sector in 2024.
Reivitis: We see a lot of opportunity to partner with strong sponsors who need to move quickly, even on slightly larger transactions. We think there are great sponsors out there that have deals that can and should get done, and we are 100% hotel focused so we should be a natural fit. However, there will be more effort invested on the pro-forma projections to ensure it’s a successful financing for both the lender and sponsor. We want to be invested with sponsors and projects that work in 2024.
Spirides: There will be a continuation of the same less-than-stellar results if interest rates and property insurance premiums do not start dropping or continue going higher.
Williams: We are optimistic that rates will come down but unfortunately can’t predict exactly when that will happen. A lot of folks that didn’t lend or were very conservative on lending this year hopefully will have fuller allocations for next year and maybe a little more strain internally to put money out the door. We all are hopeful that it will be a better year and forward looking.
