Tougher lending standards imposed by regional banks are creating obstacles for hotel developers in the United States, making it more difficult for them to secure funding and resulting in a slowdown in the construction of new hotels. This slowdown comes at a time when there is a high demand for travel among Americans, according to a recent report by Reuters.
Based on statements from hotel developers, private equity firms, and general contractors, the financial strain faced by regional banks, which are the primary lenders to the hotel and commercial real estate markets, has led developers to postpone projects or seek alternative methods to raise capital.
The situation in the hotel industry highlights the broader impact of the regional banking crisis on the U.S. economy. This crisis has already led to the collapse of three mid-sized U.S. lenders and prompted a shift of deposits to larger banks.
In one example, Shopoff Realty Investments, an Irvine-based developer, had to halt the construction of Dream Las Vegas, a 21-story hotel and casino resort, following the March demise of Silicon Valley Bank. The developer is currently working on securing additional financing.
According to data from Build Central Inc., a research and analytics firm used by major hotel brands, 59 out of 98 projects under construction or in the pre-construction phase this year have been paused since March.
Joseph Delli Santi, the chief investment officer of MCR Hotels, the third-largest owner-operator of hotel brands in the U.S., stated that the regional banks that were actively financing hotels nine to twelve months ago are no longer providing the same level of support.
Over the past year, projects across Florida, Texas, and California have experienced delays due to restricted access to loans and increased construction costs. James Hansen, the executive vice president of business development at Hotel Equities, a hotel developer and operator, mentioned that the regional banking turmoil has also resulted in longer wait times for construction loan approvals.
The CEOs of major hotel companies, Hilton Worldwide Holdings Inc. and Marriott International, have also acknowledged the issue, warning of a decline in hotel developments because credit had become scarcer and more expensive, as discussed in their latest earnings calls.
Analysts predict that the slowdown in hotel development will impact the profits of large manufacturers like Caterpillar Inc., since around 75 percent of its construction sales come from commercial real estate customers. These customers are scaling back on equipment purchases due to high interest rates for machinery financing or leasing.
In the wake of the collapses of Silicon Valley Bank, Signature Bank, and First Republic Bank, many regional lenders have started considering reducing their exposure to commercial real estate by tightening their lending standards and issuing fewer loans.
Andy Ingraham, a hotel developer and the president of the National Association of Black Hotel Owners, Operators, and Developers, mentioned that smaller hoteliers who don’t have existing lending relationships are encountering obstacles in obtaining financing for their projects.
In some cases, private equity firms have stepped in to bridge the funding gaps for construction loans, but at higher costs. Evens Charles, the CEO of Frontier Development and Hospitality Group, a developer based in Washington D.C., stated that he has seen interest rates rise from around 4 percent two and a half years ago a range between 9 and 10 percent currently.
Overexposed regional banks are now selling commercial real estate loans at discounted prices. Troubled regional lender PacWest Bancorp sold $2.6 billion worth of real estate construction loans to Kennedy Wilson in May. This firm then announced that it was reselling roughly $2.3 billion of those loans to Canada’s Fairfax Financial Holdings Ltd.
An analysis by S&P Global Market Intelligence revealed that banks began reducing their hotel loan portfolios in the first quarter of 2023. Out of the 24 banks with more than $125 million in outstanding hotel and motel loans, 14 reported quarter-over-quarter decreases based on available regulatory filings.
One exception was Western Alliance, an Arizona-based bank that increased its hotel loan holdings by 14 percent in the first quarter. The bank’s spokesperson stated that they deliberately slowed down lending to the hotel sector in anticipation of overall slower economic growth.
Even before the regional banking crisis, hotel developers were already facing challenges due to high interest rates and inflated costs of raw materials caused by supply chain disruptions. Mitchell Hochberg, the president of Lightstone Group, a private real estate investor and developer in New York, stated that his firm is now putting new projects on hold as it becomes increasingly difficult to achieve favorable financial returns. Many developers prefer to wait for interest rates to decrease rather than be burdened by excessive costs.