It’s a different lending game in the hospitality industry today compared to a few years ago, said Jared Schlosser of Peachtree Group.
Banking used to be 50% of all commercial real estate lending, but banks pulling back has increased the demand for private sources of credit.
“I think we're at the beginning of, what my hope is, is a really good stretch where creative capital is going to be needed to do deals over the next several years, and so our product will hopefully be in demand,” said Schlosser, executive vice president of hotel lending and head of C-PACE and credit for Peachtree.
Peachtree’s credit team expects to end the year with more than $1.75 billion in loan originations. As of mid-October, it had passed $1 billion in lending in 2024. The company is ranked seventh in size among U.S. commercial real estate investor-driven lenders by the Mortgage Bankers Association.
Peachtree is a direct lender in the commercial real estate space, offering permanent loans, bridge loans, mezzanine loans, commercial property-assessed clean energy financing and preferred equity investments.
While Peachtree lends to several real estate classes, hotels make up its largest portion of borrowers. The company has passed $639 million in credit transactions so far this year, a 176% year-over-year increase.
Through 2024, Peachtree’s lending team handled a $41.9 million first mortgage loan for the Kimpton Sylvan Hotel in Atlanta; $40 million in C-PACE financing for the AC Hotel San Diego Downtown Gaslamp Quarter; and a $26.4 million first mortgage loan for a Hampton Inn & Suites in Columbus, Ohio.
This is the kind of market that Peachtree’s lending platform is designed for, Schlosser said. The team has expertise and specialization in hotel lending. The platform is built on various verticals that allow it to make investment decision in good times and bad.
“It’s certainly a market where if you don’t understand hotels, it’s probably not the best time to make a hotel loan,” he said. “We understand hotels, and we’re signing up and closing really good deals.”
The sponsorship profile has been much stronger in 2024 compared to past years, he said. The quality of deals has also improved.
If there’s a theme to most of Peachtree’s lending currently, it’s institutional borrowers who have pending maturities they need to refinance with someone who knows the deal and can close, Schlosser said.
Peachtree has also worked with a lot of borrowers who need to fund a property improvement plan as part of refinancing existing debt, he said. With a commercial mortgaged-backed security loan, the lender may give them the proceeds to refinance but not for the hotel renovation. Another bank may be willing to give low leverage, but the renovation will have to come out of the borrower’s pockets.
As for the impact of the Federal Reserve’s recent interest rate cut, currently it hasn’t done much other than help with morale, Schlosser said. Most loans aren’t derived from the federal fund rate; instead, they’re based on the 10-year Treasury rate and what the overall market is doing.
“There's going to need to be, I think, substantial rate cuts before people who are banking on rate cuts really feel like that's the catalyst for them transacting,” he said.
Anyone who wants to stay active in the market — whether they’re a lender, buyer, source of private equity or hotel developer — has to adjust to the new normal, he said. The new normal may be 50 to 150 basis points off the peak.
“I think rates will eventually go down a little bit, but they’re not going to go back to where they were in 2021 and 2022,” he said. “If you need that to make a deal pencil, then it’s probably not the right deal.”
The vast majority of Peachtree’s lending business this year has been in refinancing over acquisitions, he said.
“We’ve never had a year where it was all [refinancings] and no acquisitions, but that’s kind of a touchpoint for where the market is,” he said.
It’s impossible to say now what 2025 will bring in terms of hotel acquisition activity, Schlosser said. Peachtree has been active over the past two years despite overall fewer transactions, and it will continue to be active regardless of how many deals take place.
There is about $1.5 trillion in maturities coming due in the near future, which should spur hotel transactions, but the bid-ask spread is still big enough to hold back deals, he said.
“Until that gap narrows, I don’t know where the transaction market is going,” he said.
As it looks ahead, Peachtree's lending team is focused generally over at most a quarter at a time, Schlosser said. Construction deals, however, require longer time frames, and the team hopes to ramp up the construction pipeline over the next three to six months.
Loans for new hotel development make up about 25% of Peachtree’s lending business, he said.
“I’d love that number to get higher, but it’s expensive to build right now,” he said. “I don’t think there’s that many construction transactions that are necessarily out there. I think those that do press forward can deliver in a really good market.”
Year to date, Peachtree has originated nearly $200 million in C-PACE financing, Schlosser said. They expect to be at or above $300 million by year’s end. That’s the result of market demand for creative capital. Every year since Peachtree started offering C-PACE debt in 2019, it has grown this business 20%. Within the coming weeks, the company expects to pass $1 billion in total C-PACE originations.
“It's a really good product, and particularly in these markets where there's not a lot of liquidity for challenging deals — and there are a lot of challenging deals — PACE becomes a really good option where it wouldn't otherwise be considered,” he said.