While the hotel lending environment isn't expected to be nearly as favorable to borrowers in 2024 as it was in 2019, experts do believe we'll see something hoteliers have been lacking in recent years: predictability and consistency.
Lenders, investors and debt brokers seem to agree that financing, while still difficult, will have a comparatively easier path in the new year.
2024 "is going to be better than most people think," said Peter Berk, co-CEO and president of PMZ Realty Capital.
Part of the basis for that optimism is Berk believes worries about a so-called "wave of maturities" in hotels are somewhat overblown because fundamentals remain strong.
Revenue per available room "isn't growing as aggressively as it was, especially with year-over-year comparisons, but there's still plenty of cash flow, and rates are coming down," he said.
PMZ Realty Capital, which focuses on brokering debt for borrowers, was doing deals in the "mid to high eights" in the summer, and now rates have dipped below 8%, Berk said.
News that the Federal Reserve — and likely other central banks across the globe — have pivoted to start thinking about rate cuts instead increases only bolsters that belief.
Another aspect that gives Berk optimism is how hotels are increasingly viewed as a favorable asset class across commercial real estate.
"When lenders have to put out money and they look at their plate of real estate assets that they can possibly lend to, there's office, which is troubled, there's retail, which is certainly better than it was but still has a big question market around it, ... then there's hospitality, which has bounced back strong since COVID," he said.
Greg Friedman, managing principal and CEO at Peachtree Group, agreed about the relative appeal of hotels among commercial real estate.
"You look at the current value of office, and it's probably around 20% of the total commercial real estate ecosystem," he said. "So using office as an example, there's really a very limited trade to no trade in office, so those dollars groups were allocating to office [but are] trying to be diversified ... so if only a couple of points that would normally go towards office was allocated into hotels, that would be a huge tailwind to drive potentially some cap rate compression."
One of the biggest challenges in hotel lending in 2023 was the regional banking crisis spurred on by the failures of Silicon Valley Bank and Signature Bank, which caused many small- to medium-sized banks to pull back on financing.
That void has been filled somewhat by a rise in alternative lenders in the hotel space fueled by private equity money.
Friedman said that banking pullback continues to be what concerns him about upcoming real estate maturities, but firms like Peachtree Group that operates as an investor, operator and lender help to a certain degree but not completely.
"Most traditional lenders aren't lending," he said. "Forty percent of the debt market is traditionally made up of regional banks, community banks, national banks, and it's been in the press that banks are under pressure. So 40% of the market is struggling, the CMBS market makes up close to 25% to 30% of lending to hotels and that market is well under pressure, as well."
But he said what is left of the market is attracted to hotels due to "really good asset-level performance."
What remains of bank lending is going almost exclusively to borrowers with established relationships.
"They're going to be very focused on lending where they have huge depository relationships, where they have true related partnerships and relationships with borrowers where they're using them for other services that the bank is offering," Friedman said.
Sean Hehir, president and CEO of Trinity Investments, agreed about the value of relationships.
"My great friend Warren de Haan who runs ACORE Capital says they look at the three B's: borrowers, basis and business plan," he said. "And that's even more true today."
Trinity has managed to close on some pretty large loans in 2023, including a $555 million CMBS loan to purchase The Diplomat Beach Resort, a $750 million refinancing for the Grande Lakes Orlando Resort and a $515 million refinancing for The Westin Maui Resort & Spa.
With that in mind, Hehir said debt is clearly available today for the right borrowers, but less than in past years.
"If we're running a debt process, before we'd have a dozen potential lenders show up, and now it's maybe a third of that," he said. "We're still having lenders show up but there's less liquidity."
Berk said it's important to note that the debt available in the market is mostly focused on transactions and refinancing, and the construction lending landscape remains relatively barren.
"We haven't seen the construction lenders come back," he said, adding there are some specialty lenders that focus on that space, but they're a relatively small piece of the pie. "The construction loans we've seen getting done are regional lenders who do a very, very low loan-to-value, like 50% to 55%. ... And that's low single digits plus points. It's very, very hard to make those deals pencil."
Friedman said his firm continues to focus on construction because its executives take a more long-term view.
"We like to do construction loans because I think personally that in our industry, new wins," he said.