Wave of High-Priced Transactions Boosts Attractiveness of Construction Financing
While lending for new U.S. hotel development lags behind loans for transactions and refinancing deals, the segment is making its return.
Sources of capital have been wary of investing in new hotel openings given that demand for hotels has been uneven across the U.S. and can falter with surges in COVID-19 cases, but the hotel industry has been on steadier footing since vaccinations became widely available.
The good news is there is substantially more liquidity today than there has been since the pandemic started, said Daniel MacDonnell, managing director for HVS Capital Markets.
Lenders continue to be selective in what deals they finance, however. They are looking for more ideal situations, such as markets with high leisure-transient demand with a drive-to component.
While lenders are careful about the deals they pick, some of the recent hotel transactions have driven up the volume of new-construction projects, MacDonnell said. The number of deals has increased, along with the price for many of these deals, particularly for resorts, with prices exceeding $1 million per room on a more regular basis.
“That’s really supporting more development, even while all the [development] costs have gone up,” MacDonnell said. “Labor, obviously, is a little bit short. The supplies have gone up [in price]. It takes a little longer to get through planning departments. But that being said, the tailwind has been where transaction volume and then the recovery has been in some of these markets.”
When the coronavirus pandemic reached the U.S., Hall Structured Finance paused its lending for new hotel development. The company started its lending for hotel construction projects in mid to late 2020 once it determined its portfolio was healthy and could add on new projects, Vice President Brad Ferguson said.
Hall has been pursuing non-recourse loans ranging from $15 million to $100 million in size in all 50 states, he said. It’s one of the few lenders out there willing to offer loans at high leverage points for new projects, up to 75% loan to cost, he said. It does require a completion guarantee from the key principles in the sponsorship group.
“We’re looking to do roughly $700 million in new-construction projects next year,” he said.
As of September, there were 1,364 hotels in construction in the U.S., representing 172,251 rooms, according to STR, CoStar’s hospitality analytics firm. Additionally, there are 1,867 hotels with 205,829 rooms in the final planning phase and 2,217 hotels with 263,673 rooms in the planning phase.
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