NEW YORK CITY — The trend for banks to pull back from traditional hospitality lending that started after the COVID-19 pandemic and has accelerated in recent months with the regional banking crisis in the United States is here to stay with private credit providers waiting to fill the gap.
According to panelists on the Financially Speaking: IREFAC Insiders session at the NYU International Hospitality Industry Investment Conference at the New York Marriott Marquis, these new lenders are going to be very busy. Data provider Trepp suggests close to $1.5 trillion in commercial mortgages are coming due in the next three years, meaning investors are set to face some tough choices, either sell up, put in more equity or find someone else to plug the gap.
“What's really tricky is for the last two decades we’ve seen an industry … that has been fueled by free money where basically every concept works for the most part. And so now we're going through this more realistic, Darwinian phase, where it's going to be survival of the fittest,” Gilda Perez-Alvarado, global CEO of JLL Hotels & Hospitality.
This period of borrowing rates in the high single digits is going to be very different from the benign years post global financial crisis.
“People got used to owning assets with 4 percent interest rates, and now they’ve got to refinance at 9 percent. And they had an interest rate cap at one or two or three percent. And now they have to rebuy that cap, and now it's going to be a cap 5 percent…I don't think we've even started to see the implications of that,” said Eric Resnick, CEO of KSL Capital Partners.
Changing Landscape
A perfect storm of events have come together to curtail the ability of traditional banks to freely lend to the hotel real estate industry. On the one hand you’ve got the above mentioned higher interest rate environment, making underwriting more difficult and dragging valuations down. Tie this together with the much stricter regulatory framework for bank lending.
“In the regulated banking space, it's going to be tough. I think there's a secular shift there to much higher levels of capital. That's not going backwards. There's no way that's going to change in our lifetime in my view. 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,” said Christopher Jordan, managing director/head of specialty real estate finance, Wells Fargo Corporate and Investment Banking.
And where the banks have retreated, into the gap has come players like KSL, with its credit arm.
“It will surprise me if we're not investing many billions of dollars in hotel credit over the next few years," Resnick said.
KSL likes to invest in transitional assets where it can help fund investment in capital projects to deliver “some of the best ROIs.”
“We've been a net beneficiary of that by partnering with, we think, great owners who want to be able to reinvest in their assets and believe in the same long-term trends worldwide,” Resnick said.
A lot of assets haven’t had any capex spent on them since the start of the pandemic with owners deferring plans cover hotel closures.
“We all worked with our owners because it was the right thing to do, but no capital has gone into these assets over the last four or five years…you've got to be able to get creative because that doesn't fit into the traditional boxes,” said Kevin Jacobs, chief financial officer and president, global development at Hilton.
A version of this story ran on Hotel Management's sister site, Hospitality Investor.