by: Elton Luk

As the hotel sector’s performance returns to pre-pandemic levels, fueled by eased travel restrictions and a surge in consumer demand for travel, activity within the hotel industry is poised for significant growth and opportunity. This revitalization of the hospitality industry combined with potential rate cuts and a maturity wall in 2024 will make it challenging for current owners to refinance existing loans without injecting more capital, opening doors for new investors. Opportunities for new buyers exist, however it’s not all rainbows and unicorns for existing hotel owners due to the current interest rate environment and the distress that the state of the capital markets poses.

The current landscape presents a unique scenario of buying opportunities for investors, primarily driven by a tough financing market that limits competition. Many current hotel owners who are locked in at affordable rates may look to offload their assets when their current loans reach maturity. While investors face significant headwinds in securing favorable financing terms, Revenue Per Available Room (RevPAR) is forecasted to grow 3.0% in 2024 according to a recent CBRE report. If interest rates continue to decrease as many expect to happen this year, hospitality investments should prove much more attractive. Another significant factor to take into consideration is the dislocation we are seeing between supply and demand. Yahoo Finance said that Metropolitan areas like New York City have banned short-term rentals causing hotel prices to rise roughly 10% on a year-over-year basis since the ban was implemented, further enhancing RevPAR growth. These short term rental bans and restrictions are becoming more and more common throughout the U.S. San Francisco, Santa Monica, Anaheim, and West Hollywood have also tightened restrictions on AirBnb listings making it more challenging to secure short term rental permits. Rising RevPAR, tightening short-term rental regulations, and anticipated interest rate reductions create a promising landscape for hospitality investments. Investors positioned to navigate the challenging financing climate and capitalize on these dynamics stand to gain significantly as the market adjusts to the evolving demand and supply conditions.

On the flip side, current hotel owners are facing their own set of challenges. Many investors are struggling to find financing options that allow for a cash neutral refinance. The combination of the current interest rate environment and lenders being constrained by 1.30-1.40x Debt-Service Coverage Ratio (DSCR) requirements leaves a gap forcing owners to either sell in order to repay existing loans or inject fresh equity. The situation is further exacerbated by an impending maturity wall due this year and next, totaling $42.3 billion, the third highest among all property types according to Cred IQ. This financial pressure is further heightened by the past reliance on CMBS loans (Commercial Mortgage-Backed Securities), which if refinanced in the current rate environment, would not only lock borrowers into higher interest rates but provided interest rates do come down would lead to elevated defeasance costs in future years. Many hotel investors and owners may need to sell off their assets to relieve themselves of these financial pressures or be willing to weather the storm that may or may not present a path to recovery in the near future.  

Historically, the hotel sector enjoyed a healthy influx of CMBS loans, and the rates secured in 2019-2022 hugely benefited the sector and injected it with the capital that it needed. However, the present narrative has shifted, with the hotel sector now perceived as a riskier investment compared to other asset classes like multifamily. Opportunistic investors and lenders who are still willing to lend or invest in the hospitality space are looking to charge a risk premium for the increased risk they are facing in this current period of uncertainty or look to mitigate their downside in other ways. Many large institutions and banks are playing the waiting game on deploying capital given the looming election coming in November and the Federal Reserve’s heightened caution in terms of lowering rates too quickly. This shift has led to a tightening of available capital, making it harder for hotel owners to secure the necessary funding that they need to remain profitable. Looking ahead, the looming maturities provide both challenges and incentives for lenders and hotel owners alike to renegotiate terms. The concept of “extend and pretend” is likely to become more prevalent, with lenders reluctant to take back hotel assets and investors eager to preserve their equity. 

The path to recovery for the hotel industry is paved with both golden opportunities and daunting challenges depending on your risk appetite. For prospective investors the market conditions present a ripe landscape for entry, bolstered by favorable RevPAR trends and a supply-demand imbalance. Conversely, existing hotel owners must navigate the current financial storm, facing refinancing hurdles and the looming threat of loan maturities. As the industry moves forward, the dynamics of capital markets will play a crucial role in shaping the future of hotel investment, with stakeholders on both sides of the aisle looking for innovative ways to adapt and thrive in the dynamic world of commercial real estate. With this in mind, Lever Capital Partners’s long track record in the hospitality sector allows us to guide owners and developers through these challenges. For the last 15 years, Lever Capital Partners has provided exceptional and reliable service by leveraging our strong relationships and connections to help our clients find the capital they need.

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