This year represented a rare and unique moment in the history of the modern hotel industry.
In 2023, the hotel segment saw a rare combination of thriving operating metrics with businesses healthy and growing but a languishing financing environment with increasing costs and limited availability of debt, making it harder to pencil deals or refinance maturing debt.
Hotel News Now recently took a look at some of the major issues that affected borrowing in the hotel industry in 2023 to help put the overall environment into context as hoteliers move into what experts believe will be a more stable and open 2024.
The Fed and Interest Rates
Ask any lender or borrower what makes debt more difficult today than in 2019, and it's likely they'll point to the Federal Reserve — and central banks across the globe — increasing interest rates in an ongoing battle against inflation.
With interest rates hovering just above zero as recently as early 2022, the Fed has pushed rates up a stunning 525 basis points since March 2022, with Chair Jerome Powell openly waging a war to stabilize prices across the economy.
There are some signs that the Fed could soon declare victory in that war, with the consumer price index cooling off considerably in late 2023 and job growth noticeably slowing.
There is now widespread hope that the Fed could soon reverse course and lower rates somewhat, although investors similarly hope they don't see the economic downturn many had predicted earlier in 2023, as that is usually the impetus for interest rate decreases.
Banking Crisis and Regulations
The simultaneous crash of two regional banks — Silicon Valley Bank and Signature Bank — in the early stages of 2023 cast a pall on the year as similarly sized banks sought to shore up for a potential crisis and regulators decided to clamp down and avoid a widespread problem.
A lack of liquidity among small and midsize banks and new rules about how much risk they could take on was a huge limiting factor for borrowers in the hotel industry and across commercial real estate. Such banks are traditionally the bread and butter among real estate lenders.
Heading into a presidential election year in the U.S. means there could be even more regulatory uncertainty in 2024, though, as each party and candidate is likely to adopt a different approach to banking regulations going forward.
Commercial Real Estate Struggles
Despite 2023 being a strong operating year for hotels, there were huge parts of the larger commercial real estate sector that didn't fare as well, giving lenders yet another reason to be hesitant about lending to real estate investments. Offices in particular were plagued with continued vacancies as big businesses struggled to get employees back into offices or generally downsized their office footprints.
There are signs that this could be a long-term silver lining for the hotel industry, which some experts consider as a hedge against inflation. The hotel industry has the power to reprice on a daily basis and could now be viewed more favorably compared to other struggling sectors.
Mounting Maturities
The amount of debt maturities in hotels and real estate continues to be a hot button issue heading into 2024, and while there hasn't been wide-scale distress in the industry because of it, it has spurred some high-profile instances of companies handing back keys to lenders.
Two hotel-focused real estate investment trusts handed back keys in 2023.
Park Hotels & Resorts walked away from a $725 million loan that covered the Parc 55 San Francisco and the Hilton San Francisco Union Square, putting those properties into receivership.
Similarly, Ashford Hospitality Trust is in the midst of handing back the keys on a portfolio of 19 hotels that required $255 million in paydowns to extend loan terms that executives deemed to have "negative equity value." So far the REIT has handed back five of those 19 hotels.