LOS ANGELES—Lenders are getting more conservative on hotel financing, according to Mitch Paskover, president of Continental Partners. The firm has financed several major hotel loans in the past year, but Paskover says that lenders today are taking a more conservative approach to hotel deals and offering less leverage. The same trend is happening in other markets as well. To find out the drivers behind the shift, we sat down with Paskover for an exclusive interview. Here, we discuss the hotel lending climate, why uncertainty is the new buzzword and what trends are overlapping in the hotel market from other sectors.
GloveSt.com: Continental Partners has financed several major hotel transactions this past year, most recently the Ritz-Carlton Rancho Mirage. Looking ahead, what does lender appetite look like for hotel assets?
Paskover: While lenders are still willing to finance hotels, many are taking a more conservative approach in their underwriting and are hesitant to originate higher leverage loans. The hotel sector has demonstrated steady growth over the past several years, yet some lenders believe that the market is reaching its peak as occupancies stabilize and average daily rates moderate. As a result, many lenders are underwriting based on the last two to three years of an asset's performance instead of underwriting the last 12 months of performance.
That said, there is still strong lender appetite for high-quality, full-service hotels with solid financials and high average daily rates. For the best quality, five-star hotels, lenders are being aggressive with their terms and are even offering interest-only loans. For limited-service hotels, on the other hand, lenders are lowering their leverage to offset potential risk. That is not to say that there isn't competitive financing available for limited service hotels. Borrowers will simply need to work harder to demonstrate their investment strategy to lenders, and will need to work closely with an experienced financial partner to secure the best terms for their hotel assets. For example, by identifying lenders that are willing to underwrite loans based on an asset's trailing 12 month income (peak market performance), we've been successful in originating higher loan amounts on behalf of borrowers for both full-service and limited service hotels.
GlobeSt.com: Uncertainty seems to be the buzzword for the hospitality sector. What factors are contributing to this cautious outlook on the hotel market?
Paskover: Some lenders believe that the hotel market is in its 7th inning and that average daily rates have hit a plateau. In the past, lenders would underwrite loans with a leverage of 75% for full-service hotels and 70% for limited-service hotels. Today, lenders are dialing back on their leverage to 70% and 65% for full-service and limited-service hotels, respectively.
Another factor that is contributing to this uncertainty is the rise of Airbnb. Full-service hotels will not be severely impacted by Airbnb, as many upscale hotel guests still want a full luxury experience which includes daily room service, upscale restaurants, spa services and concierge-service amenities. Limited-service hotels, on the other hand, are increasingly competing with Airbnb units and will likely be affected by the growing popularity of Airbnb, resulting in increased caution when it comes to financing lower-tier hotels. Despite this cautious outlook, the hotel market remains strong, especially in Los Angeles where tourism is flourishing. As the largest city in California, Los Angeles remains one of the top tourist destinations on the west coast and continues to attract millions of visitors every year. LA's record-breaking tourism is sparking new hotel development in areas such as downtown, where over 2,500 hotel rooms are currently under construction to meet tourist demand.
GlobeSt.com: Lenders across the board are generally being more conservative when it comes to financing commercial assets. What overarching trends are impacting commercial lending in the current market landscape?
Paskover: One of the challenges facing commercial real estate today is construction financing. Obtaining construction loans has become much more difficult, in part due to the HVCRE regulations under Basel III. These tighter regulations are certainly having an impact on construction financing across all product types, from multifamily to hotels. That said, there is still construction financing available, provided that borrowers have a solid investment strategy in place. For the hotel sector, lenders will consider submarket occupancies and average daily rates when financing a new development, and will typically favor markets that are experiencing strong tourism and fundamentals. By providing detailed market comps, we've been successful at securing competitive construction loans on behalf of our clients.
There's also been some speculation that the increase in new hotel supply will impact market fundamentals moving forward. However, this cautious outlook on the hotel sector is less of an oversupply issue and more of a concern about daily rates reaching a plateau.
While submarkets such as downtown Los Angeles have seen a recent influx in new hotel construction, there has not been a lot of new hotel development on the west side in areas such as Hollywood and Brentwood. The Los Angeles hotel market as a whole has not been overbuilt, and will continue to demonstrate solid fundamentals well into 2017 and beyond.
GlobeSt.com: How is Continental Partners securing competitive financing for hotel assets?
Paskover: At Continental Partners, we leverage our market expertise and extensive capital relationships to negotiate the most competitive terms on behalf of our clients. We arrange weekly calls with lenders and keep our finger on the pulse of the market, allowing us to best match borrowers' objectives with the most optimal financing programs available. By broadening our scope of capital sources, which include banks, CMBS lenders and life insurance companies, among others, we've been successful at delivering competitive capital solutions for a number of hotel assets, from full-service to limited service hotels.
LOS ANGELES—Lenders are getting more conservative on hotel financing, according to Mitch Paskover, president of Continental Partners. The firm has financed several major hotel loans in the past year, but Paskover says that lenders today are taking a more conservative approach to hotel deals and offering less leverage. The same trend is happening in other markets as well. To find out the drivers behind the shift, we sat down with Paskover for an exclusive interview. Here, we discuss the hotel lending climate, why uncertainty is the new buzzword and what trends are overlapping in the hotel market from other sectors.
GloveSt.com: Continental Partners has financed several major hotel transactions this past year, most recently the Ritz-Carlton Rancho Mirage. Looking ahead, what does lender appetite look like for hotel assets?
Paskover: While lenders are still willing to finance hotels, many are taking a more conservative approach in their underwriting and are hesitant to originate higher leverage loans. The hotel sector has demonstrated steady growth over the past several years, yet some lenders believe that the market is reaching its peak as occupancies stabilize and average daily rates moderate. As a result, many lenders are underwriting based on the last two to three years of an asset's performance instead of underwriting the last 12 months of performance.
That said, there is still strong lender appetite for high-quality, full-service hotels with solid financials and high average daily rates. For the best quality, five-star hotels, lenders are being aggressive with their terms and are even offering interest-only loans. For limited-service hotels, on the other hand, lenders are lowering their leverage to offset potential risk. That is not to say that there isn't competitive financing available for limited service hotels. Borrowers will simply need to work harder to demonstrate their investment strategy to lenders, and will need to work closely with an experienced financial partner to secure the best terms for their hotel assets. For example, by identifying lenders that are willing to underwrite loans based on an asset's trailing 12 month income (peak market performance), we've been successful in originating higher loan amounts on behalf of borrowers for both full-service and limited service hotels.
GlobeSt.com: Uncertainty seems to be the buzzword for the hospitality sector. What factors are contributing to this cautious outlook on the hotel market?
Paskover: Some lenders believe that the hotel market is in its 7th inning and that average daily rates have hit a plateau. In the past, lenders would underwrite loans with a leverage of 75% for full-service hotels and 70% for limited-service hotels. Today, lenders are dialing back on their leverage to 70% and 65% for full-service and limited-service hotels, respectively.
Another factor that is contributing to this uncertainty is the rise of Airbnb. Full-service hotels will not be severely impacted by Airbnb, as many upscale hotel guests still want a full luxury experience which includes daily room service, upscale restaurants, spa services and concierge-service amenities. Limited-service hotels, on the other hand, are increasingly competing with Airbnb units and will likely be affected by the growing popularity of Airbnb, resulting in increased caution when it comes to financing lower-tier hotels. Despite this cautious outlook, the hotel market remains strong, especially in Los Angeles where tourism is flourishing. As the largest city in California, Los Angeles remains one of the top tourist destinations on the west coast and continues to attract millions of visitors every year. LA's record-breaking tourism is sparking new hotel development in areas such as downtown, where over 2,500 hotel rooms are currently under construction to meet tourist demand.
GlobeSt.com: Lenders across the board are generally being more conservative when it comes to financing commercial assets. What overarching trends are impacting commercial lending in the current market landscape?
Paskover: One of the challenges facing commercial real estate today is construction financing. Obtaining construction loans has become much more difficult, in part due to the HVCRE regulations under Basel III. These tighter regulations are certainly having an impact on construction financing across all product types, from multifamily to hotels. That said, there is still construction financing available, provided that borrowers have a solid investment strategy in place. For the hotel sector, lenders will consider submarket occupancies and average daily rates when financing a new development, and will typically favor markets that are experiencing strong tourism and fundamentals. By providing detailed market comps, we've been successful at securing competitive construction loans on behalf of our clients.
There's also been some speculation that the increase in new hotel supply will impact market fundamentals moving forward. However, this cautious outlook on the hotel sector is less of an oversupply issue and more of a concern about daily rates reaching a plateau.
While submarkets such as downtown Los Angeles have seen a recent influx in new hotel construction, there has not been a lot of new hotel development on the west side in areas such as Hollywood and Brentwood. The Los Angeles hotel market as a whole has not been overbuilt, and will continue to demonstrate solid fundamentals well into 2017 and beyond.
GlobeSt.com: How is Continental Partners securing competitive financing for hotel assets?
Paskover: At Continental Partners, we leverage our market expertise and extensive capital relationships to negotiate the most competitive terms on behalf of our clients. We arrange weekly calls with lenders and keep our finger on the pulse of the market, allowing us to best match borrowers' objectives with the most optimal financing programs available. By broadening our scope of capital sources, which include banks, CMBS lenders and life insurance companies, among others, we've been successful at delivering competitive capital solutions for a number of hotel assets, from full-service to limited service hotels.
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