Hotel Owners Choose Refinancing Over Selling

Demand for hotel refinance capital is increasing. In some cases, hotel pricing is not meeting the expectation of owners, and as a result, many are choosing to hold rather than sell. For buyers, this has meant limited hotel investment opportunities on the market. For owners, this has meant renewing debt and extending the business plan on an asset.

“We are seeing very little product for sale on the market. Buyers are hungry for more, and sellers aren’t necessarily seeing the values that they would like to see when they are selling,” Cara Leonard, SVP at CBRE who recently joined the hotel capital markets team, tells GlobeSt.com. “As a result, the need for refinance capital has increased tremendously, which is positively impacting our business and the need for assistance in sourcing the appropriate refinance capital.”

Hotel owners aren’t alone. Lenders are also clamoring for hotel deals, and have been happy to fill the demand. “There is a tremendous amount of liquidity generally within the capital markets right now. Not every lender lends on hotels, but within the set of lenders that do, there is tremendous appetite,” says Leonard.

Banks have continued to show interest in hotel deals, and other sources have increased their exposure to hotel product. “Banks have remained steadfast in the their appetite. They are still conservative on advanced rates and are very careful in their underwriting,” adds Leonard. “When you have transitional deals or value-add deals that have challenges to them, the banks may or may not be the right fit. There has also been tremendous growth in the fund space as well. We are seeing a number of funds offering bridge spreads that are competitive with a lot of the banks. You can get anywhere from the same pricing for similar profile deals as you would get from a balance sheet bank loan on a non-recourse basis or you can get higher proceeds with still very competitive pricing.”

Rising interest rates have been a major concern in other asset classes, however, hotels are able to secure favorable rates. “Base rates are coming up, but spreads are competitive,” according to Leonard. “That may mean that you aren’t getting the same interest rate that you were a year ago, but rates are still competitive.”

While interest rates are heading up, Leonard does not believe the increases are driving demand for refinancing capital. Increasing rates could be fueling some activity in for borrowers refinancing from bridge deals into permanent financing, but otherwise, rising rates aren’t a driver of the activity. “Refinancing from bridge loans into permanent financing is the space where you would most likely see borrowers trying to get financing earlier,” she says. “They might secure financing six months to a year early if they are concerned about rising interest rates. The other spaces aren’t seeing that trend. On bridge financing with a three-to-five year term, rates are important, but there is not a lot of leeway on when you finance them. We are also seeing a lot of activity on seven- to 10-year permanent loans that are rolling into the next seven- to 10-year permanent loan. When you have those, often times there is defeasance concerns that counter concerns over rising interest rates.”