“If you build it, they will come” – but not unless developers secure the necessary financing to build a new hotel or convert an existing site to welcome guests.
U.S. hotel construction achieved monumental levels in the past decade as a result of consumer demand outweighing hotel supply. Even though that gap has significantly narrowed, average daily rate (ADR) is still driving revenue per available room (RevPAR) – meaning hotel construction is on-going, although at lesser levels. As financing sources continue to evaluate the risk versus reward for new-builds and hotel conversions, here are the top four hotel financing trends for the rest of 2018 and into 2019.
Alternative Funding Sources Gain Momentum
Building or converting a hotel is a near-herculean task. It starts with a vision and is fueled by the money. Between the seemingly endless number of hotel projects in the pipeline and the volume of financing needed to bring them to fruition, a solid trend has emerged and continues to thrive – alternative lending sources to traditional banks have firmly ingrained themselves in the fabric of hospitality financing today like never before because of their flexibility and creative financing structures.
Why does the appeal of private lending sources remain strong?
• They are not subject to the same regulatory constraints of commercial real estate allocations on a bank’s balance sheet
• They offer more flexible loan terms and non-recourse debt
• They encourage speed-to-market by closing quicker than a bank (sometimes developers must accept a higher interest rate, but they get faster access to funds to start building or converting)
• They are adaptable to developers’ needs and market fluctuations, including providing higher leverage loans
A sign of the momentum of alternative lending sources, HALL Structured Finance (HSF), a Dallas-based direct private lender, has closed over $160 million in hospitality loans this year and is on track to close over $400 million by the end of 2018. The company was also the nation’s third largest hotel construction lender in 2017.
Brands Remain A “Seal Of Approval”
Working with a trusted brand makes a difference when it comes to hotel financing. The confidence developers feel when they’ve aligned with a brand partner known for its accomplishments is the same confidence that lenders experience when they’re approached about hotel projects.
Whether for new-builds or conversions, hotel projects affiliated with a strong brand celebrated for its reputation and proven track record of success remain more attractive to lenders, and there is no sign of this waning in the future. A well-respected brand brings much to the table, including marketing and sales support, technology innovations, an extensive reservations network, and educational and training resources. Thanks to these offerings, the right brand stamps a “seal of approval” on hotel development, encouraging funding sources to move forward on a project with certainty.
Lenders are also increasingly supporting dual-branded projects because of their growth in popularity, how they incorporate multiple cost segments under one roof, and their ability to draw a larger pool of customers.
Trendsetters Attract Financing
Lenders are presented an abundance of hotel projects to evaluate, but they can only fund so much development. Market intelligence, property positioning, developer experience, and the hotel’s potential for success are all major factors, but what else is considered?
Lenders today are attracted to project creativity, particularly ones that offer unique, desirable amenities and stay ahead of market trends. HALL Structured Finance is seeing a new emphasis on projects with a wellness focus – think 24-hour access to a pool or gym, in-house nutritionist, juice bar, fitness clothing boutique, aromatherapy and yoga. Technical innovation is another big area of growth.
Size Matters – Small Sells
Constructing a hotel sometimes seems like “perpetual shrinking wallet” syndrome. The hard reality today is that rising construction and labor costs show no signs of diminishing. And, mounting costs can stall progress when developers don’t have adequate contingency plans in place to handle monetary increases and other project delays.
As a result, lenders are being approached more and more to fund hotel projects with smaller footprints and less extensive facilities (like economy, mid-scale and upper mid-scale properties) because they are cheaper to develop. These projects are typically seen as less risky due to their operating efficiencies and lower cost basis, making it easier to secure financing. The proliferation of so many brand segments has also given developers even more options to consider when selecting a hotel flag.
Location is also a major consideration. Construction and labor costs are generally lower in secondary and tertiary markets, so projects in these geographic locations have become more attractive to lenders.
Bringing hotel projects to fruition remains challenging, but development continues to move forward as long as the money is there. Developers can explore flexible alternative funding sources; align with a trusted brand that brings a new level of confidence to a project; consider hotels with smaller footprints; and weave a wellness focus into the offerings. Show them the money, please.