US hotel developers face cash shortage due to lack of construction loans.

Regional Bank Lending Standards Slow U.S. Hotel Development

By Bianca Flowers and Priyamvada C

Tighter lending standards from regional banks are making it harder for U.S. hotel developers to secure funding, slowing construction of new hotels at a time Americans’ appetite for travel is ripe.

Hotel developers, private equity firms, and general contractors are feeling the financial stress on regional banks, the largest lenders to hotels and other commercial real estate markets. This has forced developers to postpone projects or find other creative ways to raise capital, according to Reuters.

The hotel industry’s predicament highlights the impact on the broader U.S. economy of the regional banking crisis, which resulted in the failure of three mid-sized U.S. lenders and prompted a flight in deposits to larger banks.

“The regional banks that used to be active for us 9 to 12 months ago are not showing up to finance hotels for us today,” said MCR Hotels Chief Investment Officer Joseph Delli Santi, the third-largest U.S. owner-operator of hotel brands including Hilton.

Since March, 59 of the 98 total U.S. hotel projects that broke ground or were in the pre-construction phase this year have been paused, according to previously unreported data shared with Reuters by Build Central Inc., a subscription-based research and analytics firm used by some large hotel brands to gauge market opportunities by location.

Impact on the Broader Economy

Chief executives of major hotel companies, Hilton Worldwide Holdings Inc and Marriott International, have also alluded to the issue – warning of a reduction in hotel developments as credit becomes more expensive and less available, in their latest earnings calls. Analysts say slower hotel development will also limit profits of blue-chip manufacturers like Caterpillar Inc., whose commercial real estate customers account for around 75% of construction sales. Customers are scaling back on equipment purchases, deterred by high interest rates to finance or lease machinery.

Smaller Hoteliers Hit Roadblocks

As lending criteria grew more stringent, smaller hoteliers without existing lending relationships began to hit roadblocks, said Andy Ingraham, a hotel developer and president of the National Association of Black Hotel Owners, Operators, and Developers.

Ingraham said he and other members are struggling to get financing for various projects. In some cases, private equity firms have stepped in to fill in funding gaps for construction loans, but at steeper costs, said Evens Charles, chief executive of Frontier Development and Hospitality Group, a Washington D.C. developer whose portfolio includes 10 hotels.

“I’m hearing 9-10% (interest rates) and it’s coming from a 4% environment two-and-a-half years ago,” he said.

Offloading Commercial Real Estate Loans

Small to mid-size banks, including lenders with less than $250 billion in assets, hold roughly $2.3 trillion in commercial real estate loans for structures like offices, hotels, and warehouses, the equivalent of 80% of their total liabilities. Overexposed regional banks are now offloading commercial real estate loans at a discount. Troubled regional lender PacWest Bancorp announced in May it would sell $2.6 billion worth of real estate construction loans.

Banks started to reduce their hotel loan portfolios in the first quarter of 2023, an analysis by S&P Global Market Intelligence found. Based on available data from regulatory filings, the study showed 14 of 24 banks that held more than $125 million in outstanding hotel and motel loans reported quarter-over-quarter decreases. Western Alliance was the anomaly. The Arizona-based bank boosted its hotel loan holdings in the first quarter by 14% from the previous quarter. Western Alliance did not respond to request for comment.

Conclusion

Elevated interest rates and inflated raw material costs due to supply chain backlogs were already hurting hotel developers even before the regional banking crisis. The situation has made it harder for developers to secure funding, slowing construction of new hotels at a time when Americans’ appetite for travel is ripe.

“It’s getting harder to pencil in a good hotel deal,” said Mitchell Hochberg, president of Lightstone Group, a New York-based private real estate investor and developer with a $3 billion portfolio of hotel properties. “A lot of developers would prefer to sit on the sidelines until rates come down rather than be burdened with the excess costs.”