Tag Archives: LeverCapitalPartners

Heartbreak Hotel or Hotel California? An Investment Opportunity or Unnecessary Challenge in the Hotel Industry’s Revival in 2024

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.

References:

https://www.cbre.com/press-releases/cbre-hotels-expects-revpar-growth-in-2024-fueled-by-higher-rates-and-stronger-demand https://cred-iq.com/blog/2023/12/13/2024-commercial-real-estate-maturity-outlook-2023-cre-loan-maturities/ https://www.costar.com/article/272132985/amount-of-maturing-hotel-cmbs-loans-balloons-this-year-after-getting-extensions https://hotelsmag.com/news/u-s-hotel-investment-set-to-accelerate-in-2024-particularly-in-top-urban-markets/ https://finance.yahoo.com/news/nycs-airbnb-ban-looked-trouble-131500196.html?guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&guce_referrer_sig=AQAAAMV8xqBLs3bsrlOAn3_4KykEN5sRsq-Lw3jN2dUyTQu14a2HkpD0RK0khyBBnVF2dl75ja7YUKCFnBYYAiqxEmfC7zcIWLB-2Svd_mtps2yspHloOR0ufTVUBLLsxTk6RFZtEi0QoIbGm_BpoUkTwh0DCFDFaricn21TV6LkIa1x&guccounter=2 https://www.unfairbnb.net/airbnb-bans1

Why FinTech isn’t making a dent in Commercial Real Estate Finance Brokerage

by: Adam Horowitz

The pace of technological advancement is reshaping numerous industries, leading to significant transformations and job displacements. Yet, despite the efforts of numerous tech companies, the Commercial Real Estate Finance Brokerage industry remains largely untouched by disruptive innovations. Why is this the case?

We’ll explore what I think are the three main reasons for this:

1) At its core, commercial real estate finance is driven by relationships rather than simple matching algorithms. 

2) Lenders and investors rely on trusted sources to conduct thorough underwriting processes, which cannot be easily standardized. 

3) The human element of trust and expertise plays a crucial role in navigating the complexities of this industry.

Unlike residential mortgages, obtaining a commercial real estate loan entails a far more intricate process, involving a multitude of data points and considerations. From sponsor backgrounds to market trends, each project demands meticulous scrutiny. While technology can aid in identifying potential capital providers, it’s the expertise of individuals that ultimately ensures successful transactions.

The difficulty in standardizing the vetting process stems from the unique nature of each project. While some may appear straightforward, others require in-depth analysis of market dynamics and sponsor track records. Identifying the weak links in complex projects necessitates a discerning eye honed through experience.

Lenders have traditionally been reluctant to expand their workforce to evaluate every transaction, preferring to rely on trusted intermediaries. This reliance on expertise extends beyond mere checkboxes, as understanding the nuances of borrowers’ experiences is essential for informed decision-making.

How do I know so much about this topic? I’m a rare tech/finance guy whose undergraduate and graduate degrees focused on both business and technology. I rode the technology wave in the 90s until soon after the dot-com bubble crashed in 2000. That crash hurt more than you can imagine as I had a lot of stock options and the company I was at was going public on the NASDAQ two days after the stock market crash. I hung around for a bit longer, then moved into the CRE finance world in NYC just after 9/11.

Taking into account the knowledge that I had gained, I tried to implement as much tech as I possibly could to streamline processes, automate tasks, and focus on having the best database in the industry. I also acknowledged that you can’t stop progress so I invested in a few of those same FinTech companies that failed. Some of those investments were profitable due to increased deal flow, and others created a write-off after values went to zero.

At Lever, we use technology to help us do one thing and one thing only; to provide capital at the best available terms for our clients. If tech helps us do that then we use it, and if it does anything else, then we don’t. I look forward to seeing how tech evolves in the commercial real estate industry and we’ll continue to use it so long as it brings results to the only people that matter…our clients.

Micro-Construction: A Game-Changer for Solving the Student Housing Crisis

by: Rachel Epstein

A recent survey uncovered that 43% of students at four-year colleges in the United States grappled with housing insecurity in the year leading up to the study, an increase of over 100% since 2022 (Benbow, 2023.) This troubling trend is forcing many students to couchsurf with friends or commute from home to attend school. In response to this challenge, the University of San Diego turned to a temporary solution by placing students in hotel rooms due to a shortage of on-campus housing (Staff, 2023). The aforementioned solution has been seen at the University of Miami and other campuses as well. This predicament has been intensified by a 9% surge in student housing demand over the past year (Staff, 2023). To address the escalating housing crisis, micro-construction is emerging as a solution, offering compact living units that provide individuals with personal space while accommodating more occupants within a single building, thus alleviating the strain on student housing.

Micro units are smaller efficient units usually ranging from 100-200 square feet which are priced at a lower cost. These units include kitchenettes, bathrooms, and a small study space. A few other benefits of the buildings are fitness centers, game rooms, meeting spaces, and storage lockers. The buildings will incorporate larger common space for students to socialize and study. Internet is also included in the rent for their units which attracts many students to live there. An added bonus is that the units come fully furnished so one does not have to worry about purchasing furniture. As stated in the article, “… murphy beds that transform into desks”(Interactive, 2022) so the room can be transformed within minutes as one pleases. This allows individuals to have their own personal space when wanted but also gives them the opportunity to be with their friends. The emphasis on these small units genuinely represent the current generation and their need for personal space but also wanting to have time with friends.

The rent for micro-units could be significantly less expensive “…students in Vancouver can rent a 140 square foot unit for $675-$695 a month, as compared to $1,000 for a full-size unit” (Interactive, 2022). The price difference is significant enough that it can be the reason one attends school or not.  This will certainly attract students to live in these units because they could have their own space and privacy but also be able to spend time with their friends whenever they want. 

Historically, regular apartments were about 800 square feet with four bedrooms with one to two students per bedroom. The units came with a full kitchen and bathroom but the buildings had limited study and communal spaces. Students could not enjoy spending time in their apartment with all their friends. Most of the time they would have to find another location for everyone to be together. Lenders and investors are interested in these spaces because of the future micro-housing holds. 

At Lever Capital Partners we are dedicated to remaining well-informed about the evolving market for modular housing construction in the Student Housing space by diligently tracking industry trends and staying ahead of developments. Our approach involves collaborating with lenders known for their reliability, ensuring that clients receive the best possible financing solutions for their projects.

References:

https://pointintimestudios.com/micro-student-housing/ https://apnews.com/article/rent-us-college-students-1cc3bc02f25f8a628f828902029bad9b\ https://studenthousingbusiness.com/maximizing-space-is-paramount-as-costs-soar-for-developers-students/ https://www.newsweek.com/student-housing-supply-crisis-america-1795711 https://therealdeal.com/national/2023/07/05/student-housing-holds-promise-for-cre/ https://www.preqin.com/insights/research/blogs/private-capital-is-making-space-for-student-housing https://www.biggerpockets.com/blog/student-housing-remains-as-resilient-as-ever https://www.nytimes.com/2020/12/15/business/modular-construction-pandemic-coronavirus.html

Unlocking Investment Potential and Asset Diversification: The Rise of Suburban Mixed-Use Developments in a Dynamic Real Estate Landscape

by: Kyle Tran

In the dynamic world of real estate investment, suburban mixed-use developments stand out as a key opportunity for investors. Catering to the changing needs of a workforce where 12.7% are working from home and 28.2% engage in hybrid models (TenantCloud, 2023), these developments offer a unique blend of residential and commercial spaces. These developments are not just about blending spaces; they are about maximizing utility and profitability. With diversified revenue streams, they present a robust platform for investment. The presence of on-site retail and recreational amenities enriches the living experience and enhances the value of these developments, making them multifaceted and secure investment options.

The resilience of mixed-use developments is particularly noteworthy when considering their performance during and after the global pandemic. In the wake of the pandemic, these developments have shown remarkable resilience, attracting the attention of a diverse array of investors. This includes interest from EB-5 investors, private equity firms, and Real Estate Investment Trusts (REITs), as noted by Kirk in 2022. This resilience is partly attributed to their operational efficiency, which stems from a unique mix of residential, commercial, and retail elements. This blend not only optimizes operational costs but also creates a variety of revenue streams, further enhancing their appeal in the ever-fluctuating real estate market.

In addition to their resilience and diversification, mixed-use developments also stand out in terms of financial performance. Research by JLL indicates that office spaces in mixed-use developments command higher rents – by about 24.7% – compared to those in nearby submarkets. Furthermore, these properties often have higher market valuations, with lower capitalization rates by approximately 75 basis points than prime assets in the broader real estate market (Kirk, 2022). This economic advantage underscores the appeal of mixed-use developments in the current investment landscape.

Hudson Yards in New York City is a perfect example of a successful mixed-use development. This project has transformed over 28 acres of underutilized land into a thriving urban space. It boasts more than 18 million square feet of commercial and residential space, including over 100 shops, a range of restaurants,  approximately 4,000 residences, and state-of-the-art office towers. The transformative development has rejuvenated a previously dormant area of Manhattan and contributed to creating a dynamic environment that merges modern living, work, and leisure. Its design emphasizes sustainability and a community-centric approach, making it a landmark project in urban development.

Mixed-use developments were initially challenging due to the complexity of integrating multiple asset classes into one, this made financing, permitting/approvals, and valuation quite tricky. However, developers and capital providers have grown to love mixed-use assets as it allows them to mitigate risk through further diversification and operational efficiency. Data from JLL (2023) reveals that these properties maintain lower vacancy rates, even during market fluctuations. Major metropolitan areas like Chicago and San Francisco demonstrate this resilience, showing lower vacancy rates compared to central business districts.

The broad tenant base in mixed-use developments contributes significantly to financial stability. For example, if the retail sector faces a downturn, the residential or office components can continue providing steady cash flow offsetting significant loss. This balance across different tenant types ensures a consistent and resilient income stream, as highlighted in a 2023 report by JPMorgan. To summarize, mixed-use developments represent a safe and attractive investment opportunity in the current market. Their ability to adapt to changing work models, combined with their financial stability and market resilience, positions them as a strategic choice for investors.

At Lever Capital Partners, we specialize in complex financing for these kinds of developments. With over 1,000 capital provider relationships we are able to procure tailored financing solutions that cater to the unique needs of mixed-use assets and many others. We work with our clients to curate the most efficient capital stack for any commercial real estate project nationwide, allowing them to focus on what they do best. Contact Lever Capital Partners today to explore the potential of mixed-use developments in your portfolio and the financing you’ll need to get your next project across the finish line.

References:

https://www.wealthmanagement.com/development/post-pandemic-boom-mixed-use-mega-projects-underway https://finmodelslab.com/blogs/rising-capital/mixed-use-development-rising-capital https://www.jpmorgan.com/insights/real-estate/commercial-term-lending/the-growing-popularity-of-mixed-use-properties https://communityimpact.com/dallas-fort-worth/plano/development/2022/07/18/mixed-use-developments-look-to-transform-planos-landscape/ https://montgomeryplanning.org/tools/research/real-estate-and-land-use/mixed-use-study/ https://s3da-design.com/the-mixed-use-future-urban-development-in-2023-and-beyond/