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Hotel developers, private equity firms, and general contractors told Reuters the financial stress on regional banks – the largest lenders to hotels and other commercial real estate markets – has forced developers to postpone projects or find other creative ways to raise capital.
The hotel industry’s predicament highlights the impact on the broader US economy of the regional banking crisis, which resulted in the failure of three midsized US lenders and prompted a flight in deposits to larger banks.
Following the collapse of Silicon Valley Bank in March, California developer Shopoff Realty Investments paused construction of Dream Las Vegas, a 21-story hotel and casino resort, and said the firm was trying to secure more financing.
Fifty-nine of the 98 total US hotel projects that have been paused this year were put on hold since March, when the banking crisis started, according to previously unreported data shared with Reuters by Build Central, a subscription-based research and analytics firm used by some large hotel brands to gauge market opportunities by location. A total of 324 projects broke ground or are in the pre-construction phase so far this year.
“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 US owner-operator of hotel brands including Hilton.
Over the past year, access to loans and higher construction costs have delayed projects across Florida, Texas, and California, said James Hansen, executive vice president of business development of hotel developer and operator Hotel Equities, adding that the regional bank upheaval had extended wait times for construction loan approvals.
Chief executives of major hotel companies, Hilton Worldwide Holdings 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, 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.
In the weeks after the collapse of Silicon Valley Bank, Signature Bank, and First Republic Bank, many regional lenders began to consider reducing their exposure to commercial real estate by tightening lending standards and making fewer loans.
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 DC developer whose portfolio includes 10 hotels.
“I’m hearing 9% to 10% (interest rates) and it’s coming from a 4% environment two and a half years ago,” he said.
‘Sit on the sidelines’
Small to midsized 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. In an emailed statement, a spokesperson said the bank had executed a “deliberate slowdown” in lending to the hotel sector near the tail end of the first quarter with an “eye toward slower economic growth overall.”
Elevated interest rates and inflated raw material costs due to supply chain backlogs were already hurting hotel developers even before the regional banking crisis, 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.
The firm is putting the brakes on new projects.
“It’s getting harder to pencil in a good hotel deal,” he said. “A lot of developers would prefer to sit on the sidelines until rates come down rather than be burdened with the excess costs.” – Rappler.com