Hotels and the hospitality industry have suffered significantly during the pandemic, with lockdowns and health concerns across the world halting prospective travel. However, at the midway point of 2021, there are signs that financing will rebound for hotel assets quicker than initially projected. Tracking trends in refinancing in the drive-to, leisure, and luxury sectors might provide some clarity in an uncertain hotel outlook.
On the Horizon
As recent as Q4 2020, the projected performance of the hotel industry—including industry financing—was bleak. The industry saw a decline in year-over-year dollar volume for hotel property loans during 2020. As a result, analysts projected the industry would not return to pre-pandemic levels of performance for many hotel assets until 2024. Much of the industry scrambled, looking for extended loan terms or deferring new project construction for much of 2020. For 2021, Positive projections rely on a variety of factors to prompt an upswing in performance. An effective COVID-19 vaccine rollout and pent-up travel demand would influence occupancy.
The Right Direction
There was an early spike in growth at the end of 2020. From that spike, hotel financing became a focal point of Q1 2021. Vaccination rollouts and economic messaging bolstered the beginning of 2021, and a meaningful portion of commercial real estate lenders began gearing up to deploy more capital in the industry through promoting reopening and gaining consumer confidence that the pandemic would end.
Capital injection is not wholesale across the industry. Rather, much of the focus is on drive-to, leisure, and luxury destinations and resorts. Some are projecting business travel recovery to remain stagnant into 2021; although lacking business travel, luxury and boutique secondary markets—especially those within driving distance of metro areas—are showing promise. And renewed interest in financing is driving down debt costs and interest rates for borrowers in drive-to, leisure, and luxury markets.
Lenders are also eyeing states with more relaxed COVID-19 guidelines for capital investment and continue to project future investment in parts of the United States that have demonstrated a lower concern for COVID-19. In these markets, the industry is experiencing higher bookings and quicker returns akin to pre-2020 demand levels. On the other hand, rigorous restrictions and oversaturated markets—including those with strong labor unions or unfavorable ground leases—are not garnering as much attention from lenders who are being more selective about their financing.
Lender selectivity extends into other markets, too. Rather than invest in unknown or new assets or proposed development projects, lenders are preferring to refinance existing assets that have a record of strong performance. Meanwhile, construction financing is restricted to the best projects possible. Because of the relative risk of funding a new project in a potentially volatile sector following the pandemic, lenders have strayed from putting too much stock into full-scale construction projects.
Finding the right lender for a certain asset remains a mutable task. Currently, debt funds are the most active lenders, followed closely by banks, insurance companies, and CMBS, which remain selective for many high-quality assets. Although banks continue to provide the lowest cost of capital, the pricing advantage of banks has narrowed as debt fund spreads have compressed. There is greater liquidity for acquisitions or cash-in refinancing, and while debt funds prefer to quote acquisitions, most are also actively quoting refinancing.
With a renewed interest in drive-to, leisure, and luxury refinancing projects—and a renewed vigor from lenders to invest in well-performing assets—capital may find its way back into the industry sooner than expected, sending an unexpected boost through the hotel industry.