The fall of Silicon Valley Bank and Signature Bank, the largest U.S. banking collapse since the Great Recession, will ultimately lead to a shift in funding sources, difficulty obtaining hotel construction loans and a slowdown in recovery of the already challenging lending environment, say hotel analysts and owners.
It's been a tumultuous week for banks in the U.S. and Europe, with the shutdowns of Silicon Valley Bank and Signature Bank, and rescues for Switzerland's Credit Suisse and First Republic Bank in San Francisco, leading to banking stock slides, recoveries and further slides, eroding confidence among investors.
What Does This Mean for Hoteliers?
But what does it mean for the hotel sector? That's to be determined based on what part of the industry you're in, say analysts.
Many publicly traded hotel real estate investment trusts have outsized hotel ownership exposure in the greater San Francisco area. San Francisco was already severely challenged prior to SVB's collapse, and recent events won't help the recovery of that market, said C. Patrick Scholes, managing director of lodging and leisure equity research for Truist Securities, in an email interview.
Sonder Holdings, a hospitality company that manages short-term apartment-hotel rentals around the world, shared on March 10 it had approximately $20 million in deposit accounts with Silicon Valley Bank.
The company also holds a $60 million line of credit facility with SVB “issued in the ordinary course of business for the benefit of property owners and other counterparts, of which $13 million is currently utilized in the form of letters of credit.”
Sonder said it was actively monitoring the situation with SVB “and will take appropriate action as needed.”
Michael Bellisario, senior hotel research analyst and director at Baird, said via email that for the hotel brands and real estate investment trusts, he sees no direct or immediate financial impact. However, the unknown for the industry remains the near- to intermediate-term effects on financing availability and how banks could adjust their risk tolerance and allocations to hotel real estate.
“More broadly, the bigger worry is about the impact on overall economic growth and potential second order effects down the road,” he said.
Peter Berk, president of PMZ Realty Capital, a full-service real estate firm providing debt and equity for real estate projects across the country, said while the situation is fluid, the big picture with the collapse of these two banks is that the Office of Currency Control is increasing the requirement that local and regional banks must have in terms of cash on hand.
“I think we’re going to see a pullback in the banking world; people are going to be looking for alternative sources to finance their hotels or whatever other types of businesses they’re in,” he said. “That leads us toward … pension funds, insurance companies — they’re still very active in deals over $50 million. For deals under $50 million, the capital markets — like the commercial mortgage-backed securities market, specialty lenders, private lenders — they all see this as an opportunity to gain market share because they’re not subject to the same requirements as local and regional banks.”
Construction loans, which generally “come from the banking world,” will be most affected, Berk said. Other lenders, such as pension funds and insurance companies, are extremely selective providing construction loans.
“That’s usually been the bread and butter of the banking world,” he added.
Who’s to gain in this situation? Berk said it’s those individuals who already have their shovels in the ground and construction commitments underway. He said those projects will carry on, since lenders won’t walk away from their commitments.
“But getting new commitments will be difficult,” Berk said. “I think in two years' time, we’ll see a lot less new [hotel] supply coming on.”
David Loeb, owner of Dirigo Consulting, which advises on capital markets, strategy and communications issues, said the fall of these two banks slows down the recovery of the already challenging lending environment and leads to more uncertainty.
It will also make it more expensive to borrow money to invest in hotels, he said.
“If you have CMBS maturity and are looking for how to refinance that, good luck. It doesn’t mean you won’t be able to, but you’re probably going to pay more,” Loeb said. “You may find yourself in a situation, as an owner, where the new loan is significantly more expensive and more collateralized, meaning you could get less loan to value.”
When that situation arises, Loeb said there’s three options: Come up with the money, sell the hotel or default.
Laurel Keller, executive vice president of hospitality, gaming and leisure at Newmark Valuation and Advisory, said this rapidly evolving situation has led to growing expectations of liquidity strain.
“Mortgage interest rate increases will force some hotels to raise equity as debt service coverage ratios fall beneath acceptable levels, and loan origination will require more capital outlay than in recent quarters,” she said in an email interview. “If hotel owners are unable to obtain refinancing on maturing loans, they could be forced to sell, placing downward pressure on prices.
"Additionally, hotel owners that are overleveraged and/or have properties that continue to cope with pandemic impacts are most likely to face sale mandates. However, many developers and investors remain pragmatic, expecting a more favorable lending environment in the long term and staying the course with planned developments.”
William Meyer, chairman of Meyer Jabara Hotels, which owns and operates hotels, said he expects banks to tighten their underwriting criteria in the short term as they work to protect their balance sheets.
“Banks are going to be concerned that hotel loans that are on their books may be somewhat overvalued, and therefore they may have to take some degree of reserves against the loans,” he said. “Overall, you’re going to see considerable tightening by banks as it relates to the hospitality sector.”
Meyer said he feels there is a great deal of uncertainty regarding the Federal Reserve’s movement in the next six months.
“The concern with inflation, on the Fed’s part, is still out there. To the extent the Fed does decide to increase interest rates by another 25 basis points, that does have an effect upon cap rates and hotel valuations. As cap rates go up, hotel valuations go down,” he said. “Those valuations may make it very difficult — and this is I think a much bigger dilemma for the hotel industry — are those CMBS loans that are going to come due in 2024, 2025. [They] were made at a time when interest rates were unusually low, and now looking to refinance those same loans … I think that will become very difficult, and probably will require, in many cases, a significant equity infusion into the hotels that have these CMBS loans.”
What Hotel Owners Can Do
Loeb’s advice for hoteliers who might be worried about the aftermath from the fall of SVB and Signature Bank is to “scatter your deposit accounts or divvy them [up] to make sure that … you’re not concentrated in one financial institution and particularly not concentrated in one account.”
When facing any economic environment showing increased signs of risk, owners should put a contingency plan in place, communicate with their lenders, focus on mitigating increased costs, and — if permitted and possible — delay large capital projects, Keller said.
“However, some brands are growing impatient with owners who postponed [property improvement plan] renovations due to the pandemic,” she added. “Further complicating matters, according to actual renovation costs tracked by Newmark Valuation & Advisory, prices could be up to 30% higher than those incurred for the same renovation five years ago.”
Thomas Prins, principal of hotel real estate private equity firm TQP Capital Partners, said in an email interview that his company runs stress tests on all of its hotels based on risk elements.
Hotels Versus Other Commercial Real Estate
Keller said in many U.S. markets, hotel cash flow still has runway regarding pandemic recovery, though momentum is slowing down.
“Although hotels that have not yet fully recovered from the pandemic should do so soon, an economic slowdown could stifle additional growth," she said. "Cash-flow stagnation coupled with cap rate increases could cause major profitability and value impact for hotels or other commercial real estate entities.
"Though the office and apartment sectors face different problems than hotels, all three segments grapple with similar debt-related challenges, higher interest rates, etc., making overall effects comparable.”