CRE debt markets remain tight, but hotel lending shows signs of life

The broader commercial real estate market continues to struggle under the weight of high borrowing costs, strict loan terms, falling property values and a cautious banking sector. Together, these pressures have stalled refinancings, slowed new loan originations and limited transaction activity across most asset classes.

Despite the challenges, hotels have been a relative bright spot. Data from the Mortgage Bankers Association showed a small increase in the number of hotel loans closed in the third quarter, even as overall CRE lending volumes dropped sharply compared to last year. Industry analysts say there is still a financing path for nearly every type of hotel, from ground up projects to bridge and stabilized assets, though bank balance sheet debt remains the hardest to secure.

With major banks pulling back, smaller regional banks have increased their exposure to CRE, offering localized expertise and fewer bureaucratic hurdles. At the same time, private debt funds and alternative lenders have stepped into the void, deploying capital across the debt stack and benefiting from higher yields driven by elevated interest rates. These lenders are setting firm terms and generally offering lower proceeds than in prior years, but hotels’ post pandemic resilience continues to attract capital.

The industry’s strong operating performance has helped most properties meet debt service even with higher rates, limiting distress sales. Still, tens of billions in hotel loans are expected to mature over the next two years, which could drive transaction activity without necessarily producing widespread distress. Markets like San Francisco are already experiencing pricing resets as lenders and borrowers work through these challenges.

Banks remain central to the CRE financing ecosystem, holding nearly half of the market’s outstanding debt. With regulators pushing for stronger capital buffers, lenders have grown more selective, favoring existing relationships and strategic opportunities. Some investors are responding by shifting deposits to regional banks to strengthen access to balance sheet debt.

Alternative lenders and insurance companies are also expected to play a larger role in 2024 as they continue allocating capital to higher yielding sectors like hospitality. Strong consumer travel demand, flexible room pricing and solid fundamentals have positioned hotels as an attractive option across the capital stack, even as other property types face steeper challenges.

Industry leaders remain cautiously optimistic. If borrowing costs ease and operating performance remains steady, the next year could bring more liquidity and improved financing conditions for hotel owners and investors.

Article by: Bryan Wroten Full article here