Positive Metrics Drive Hotel Lending

ATLANTA—Moving into 2015, the US economy is expected to record its best performance in a decade, fostering an environment that will be conducive to strong operating results within the hotel industry. Decreasing unemployment, increasing income levels and plummeting oil prices have all led to a surge in travel by both air and car.

So how will these positive metrics affect the hotel lending environment? Demand for short-term mortgage or bridge loans and capital expenditure loans will continue to increase, resulting from the high levels of turnover in hotel ownership as well as meaningful implementation of the multi-billion dollar backlog of brand-mandated refresh programs. There is also an expected uptick in revenue per available room for hotel chains in most markets.

During the recession, poor financial performance forced many hotel renovation and expansion plans to be delayed as franchisees shifted focus to streamlining business operations. Franchisors were similarly compelled to defer compliance of such property improvement plan requirements until economic conditions became favorable again. As economic conditions have improved, previously tabled refresh programs and renovation projects are now moving forward.

The secondary and tertiary markets are currently experiencing the highest turnover in hotel ownership, and will continue to be amongst the hottest markets for bridge lending in 2015 for small to middle market lenders. With the influx of cash buyers and foreign investors, the rules have changed and buyers must move quickly to compete. Borrowers are seeking lenders who can close a short-term bridge loan quickly allowing them to acquire, renovate and stabilize the properties while giving them time to secure permanent financing at historically lower rates and higher loan proceeds.

Currently, demand is outpacing the development pipeline leaving little threat of overbuilding. In terms of the new construction lending environment, lenders remain cautious as new construction loans present greater risk to a lender due to the length of time it takes to get the hotel open and stabilized—a minimum of four years. Prudent, well vetted developers will be amongst the select loans approved by lenders.

Another trend that will continue in 2015 is the emergence of new, opportunistic lenders hoping to cash in on the growing demand for hospitality lending. This increase in available funding sources will complicate the efforts of hotel owners to find and evaluate the best lending partner and loan programs.  Borrowers should focus on lenders who specialize in the hotel industry and know the importance of working quickly while being wary of those that may provide financing across all asset classes or may also own or operate hotels which could be a potential conflict.

With a favorable economic outlook for the New Year, renovation projects and refresh programs are back in full swing. Understanding market trends and utilizing industry experts is essential to making the best informed decisions as a potential borrower in 2015.

Jon Wright is the president and chief executive officer of Access Point Financial, a direct full-service lending and advisory firm focused on the hospitality industry. He may be contacted at jwright@accesspointfinancial.com. The views expressed here are the author's own.