As part of the Americas Lodging Investment Summit’s Patron sponsorship program, ALIS organizers asked Access Point Financial’s eight timely questions as we prepare for the 22nd annual event January 23-25, 2023, at the JW Marriott/Ritz-Carlton Los Angeles L.A. LIVE. Following are his responses.
1) How has inflation and the threat of a recession affected the U.S. hotel lending environment?
Yes – rates have obviously risen with the Feds actions, though spreads have only risen modestly. Significant re-trading on assets have occurred and deal timelines are extending. The market is just adjusting and absorbing the higher rate environment. However, hotel performance continues to remain strong, but hoteliers are feeling the pressures of the higher rates, tight labor markets and broken supply chain. While the industry is functioning, participants are moving cautiously.
2) Most forecasts show supply growth checking in at about 1% each year for the next two or three years. How do you see it playing out based on Access Point’s lending pipeline?
Supply growth will be impacted to the negative. A tough time to be developing hotels – higher labor and materials costs, rising rates are all negatives to a hotel project. However, some markets are thriving and in much need of new supply. We see top notch developers reaping the benefits of this environment. If you don’t know hotels or are new to development – this is definitely not your market. Experience is critical going forward.
Also, we are starting to see brands actively engage in capital discussion to help stimulate hotel development. Brand money to support projects will be a critical piece of the development puzzle. Borrowers can’t go it alone – the brands need to help with incentives, key money, equity, sub-debt. We are having those conversations.
3) What’s the message to hotel owners, investors, and developers from the lending community in general as 2023 approaches?
The economy has changed for the foreseeable future. Capital markets are tighter, rates will be higher, growth will be slower, the labor market will continue to be challenged and the supply chains will be in flux. But with this being said, people are traveling. Young people, retirees, groups and business travel is robust. Travel patterns, however, will be different from the past. For example, in certain markets Thursdays and Sundays may be stronger than they were pre-pandemic due to flexible work dynamics allowing for the melding of business and leisure travel. Projects need to underwrite to these new headwinds.
4) How has the capital stack changed as a result of the pandemic, and is that change permanent?
Lower LTVs, need for interest reserves, flight to quality brands and sponsors - all the conservatism you’d expect. The industry is just in that part of the cycle. All those items were easing the further away we got from the pandemic… however, with the Fed’s actions and potential economic slowdown the conservatism continues to linger. So, is this permanent? No, just cyclical.
5) Based on your loan portfolio and what you’re seeing throughout the industry, what segments are performing best, and what segments will lead expansion efforts? Why?
Sunbelt. Secondary markets, extended stay, “compact full-service” (as hotels redefine their service offerings). We continue to originate bread-and-butter limited and select service loans for premium brands. At the end of the day – its location and brand.
6) What’s the most frequently asked question you receive from clients, and how do you answer?
Clients ask for spreads in the 4s! I answer… No! but seriously, the market isn’t there right now. Capital markets are getting tighter… this isn’t going to play out the same way it did post-great recession. We are in a new paradigm with the Feds actions and shocks to the labor markets.
7) What’s the most under-estimated challenge the hotel industry faces, and why?
Over saturation of hotels brands. Marriott has 30; Hilton has 20 something! What will this mean for the customer, the franchisee and the lender? Still to be determined.
8) What’s the most under-estimated opportunity for the hotel industry, and why?
PIP financing! Aging assets that just suffered through a pandemic. Brands interested in increasing the guest experience. Assets will need capital for these “required improvements” Borrowers are still in recovery mode and will need capital for these projects.
* as of September 1, 2022