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Hotel Development Insider

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Hotel construction lending will improve in 2024

by Sara Havlena January 8, 2024

Hoteliers will see more available hotel construction capital this year. Look for lenders to come off the sidelines and consider hotels once again. With interest rates projected to remain stable or decrease, there will be more deals that will work on a cash-flow basis due to the lower interest rates. The projections for interest rates in the near term will allow underwriting to “work” for more transactions. This will allow borrowers to refinance existing deals that have recently opened. Paying off the current loans will permit regional banks to extend additional credit to their customers for new projects. Also, keep an eye out for the major brands to offer guarantees or collateral to make underwriting easier and help the developer.

Rising construction and insurance costs, as well as the fact that many owners are seeing opportunities to buy at less than the cost to build, could continue to slow hotel construction. Liquidity will be focused on the top hotel projects in the best markets with strong sponsors. LTC will continue to be lower than in years past. Equity is also hard to find in today’s market, meaning borrowers will have to bring more of their own cash to the table. Lender underwriting will be challenging, and many will not want to take the risk.  

Borrowers will see 55% to 70% LTC. Rates will be at least 50 to 100 basis points wider than multifamily or industrial, leading to anywhere from 5% to 10%+. Lenders will look closely at demand drivers and sponsor track records. Borrowers with an existing relationship, that can sign recourse, will be sought after.

Banks such as Bank OZK, Wells Fargo, JP Morgan Chase, Centennial Bank and Axos Bank will fund deals. More banks could start to open to hotel construction again this year as construction loans will give them a lead time beyond the current markets and give the banks additional new business. Count on banks to want strongly branded projects and an experienced team will be required. The borrower needs to be well capitalized since banks will not stretch on leverage. Borrowers will see a maximum of 50% to 55% LTC and 5%+ rates depending on the level of recourse. Look for banks to target relationship borrowers and require some level of recourse.

Debt fund and private money lenders such as HALL Structured Finance, Rockbridge, BridgeInvest, Madison Realty Capital, 3650 REIT and Canyon Partners Real Estate will be some of the most active players. Debt fund lenders can push LTC a bit higher up to 60% to 70%. These lenders will seek smaller loans for select- and limited-service assets in tertiary markets. However, these deals will have much higher pricing. Madison Realty Capital will also fund branded residences that include for-sale condos with a hotel attached. These projects could be more favorable this year, especially those with presales.

AVANA Capital targets franchised limited-service and extended-stay projects in the fastest growing MSAs, especially in the Smile states. Hotels with reservation systems, major flags and locations near major highways will be desired. Construction loans will be in the $8M to $25M average range. Generally, LTC will be around 70% and pricing will be in the low teens. AVANA seeks developers/owners that understand the market and a sales team that understands how to secure contracts.

Top-branded products being built by experienced developers will be highly sought after by lenders. The extended-stay middle market assets will continue to benefit from a strong appetite in the capital markets. Hotel projects without a major flag will be considered in major markets with a strong sponsor.

Lenders will focus on higher growth areas and destination markets, especially in the Southeast and Southwest. High-cost urban cities with ample supply such as San Francisco, Chicago, Boston, New York City, Houston and Philadelphia will not be as financeable.

Borrowers will need experience and first-time developers will not see available capital in today’s market. Lenders will look for net worth in excess of the loan amount with liquidity of 15% to 25% of the loan amount. Borrowers should have experience building several successful similar products.

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