By Bianca Flowers and Priyamvada C
(Reuters) – Tighter lending standards from regional banks are making it harder for U.S. hotel developers to secure financing, slowing construction of new hotels at a time when Americans’ appetite for travel is ripe.
Hotel developers, private equity firms and general contractors told Reuters that financial pressure on regional banks – the biggest lenders to hotels and other commercial property markets – has forced developers to postpone projects or find other creative ways to raise capital.
The dire situation in the hospitality industry underscores the impact on the broader US economy of the regional banking crisis, which led to the bankruptcy of three mid-sized US lenders and caused a flight of deposits to large banks.
Following the collapse of Silicon Valley Bank in March, California-based developer Shopoff Realty Investments suspended construction of Dream Las Vegas, a 21-story hotel and casino complex, and said the company was seeking more funding.
Since March, 59 of the 98 hotel projects in the United States that started or were in the pre-construction phase this year have been suspended, according to never-before-seen data shared with Reuters by Build Central Inc., a research and analysis company. by subscription. used by some major hotel brands to assess market opportunities by location.
“Regional banks that were active for us 9 to 12 months ago are not coming forward to finance hotels for us today,” said Joseph Delli Santi, Chief Investment Officer of MCR Hotels, the third-largest U.S. owner-operator of hotel brands, including Hilton.
Over the past year, access to loans and rising construction costs have delayed projects in Florida, Texas and California, said James Hansen, executive vice president of business development for the hotel developer and operator. Hotel Equities, adding that the upheaval in regional banks had prolonged the wait. construction loan approval times.
The chief executives of major hotel companies, Hilton Worldwide Holdings Inc and Marriott International, have also hinted at the issue – warning of a reduction in hotel developments as credit becomes more expensive and less available, in their latest appeals. results.
Analysts say the slowdown in hotel development will also limit profits for blue-chip manufacturers like Caterpillar Inc., whose commercial real estate customers account for about 75% of construction sales. Customers are cutting back on equipment purchases, deterred by high interest rates from financing or leasing machinery.
In the weeks following 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 by granting fewer loans.
As lending criteria became stricter, smaller hoteliers without existing lending relationships began to run into obstacles, said Andy Ingraham, hotel developer and president of the National Association of Black Hotel Owners, Operators, and Developers.
Ingraham said he and other members struggled to secure funding for various projects.
In some cases, private equity firms have stepped in to fill construction loan financing gaps, but at higher costs, said Evens Charles, chief executive of Frontier Development and Hospitality Group, a Washington DC developer. whose portfolio includes 10 hotels.
“I hear 9-10% (interest rate) and that comes from a 4% environment two and a half years ago,” he said.
“Sit on the Key”
Small and medium-sized banks, including lenders with less than $250 billion in assets, hold about $2.3 trillion in commercial real estate loans for structures such as offices, hotels and warehouses, or the equivalent of 80% of their total liabilities.
Overexposed regional banks are now offloading commercial real estate loans at a discount. Struggling regional lender PacWest Bancorp announced in May that it would sell $2.6 billion worth of home construction loans.
Banks began trimming their hotel loan portfolios in the first quarter of 2023, according to analysis by S&P Global Market Intelligence. Based on available data from regulatory filings, the study showed that 14 of 24 banks that held more than $125 million in outstanding hotel and motel loans reported quarter-over-quarter declines. other.
Western Alliance was the anomaly. The Arizona-based bank increased its holdings of hotel loans in the first quarter by 14% from the previous quarter. Western Alliance did not respond to request for comment.
High interest rates and inflated commodity costs due to supply chain backlogs were already hurting hotel developers even before the regional banking crisis, said Mitchell Hochberg, chairman of Lightstone Group, a private real estate investor and developer. based in New York with a $3 billion portfolio. hotel properties.
The firm is holding back new projects.
“It’s getting harder and harder to get a good hotel deal,” he said. “Many developers would rather sit on the sidelines until rates come down than be burdened with excess costs.”
(Reporting by Bianca Flowers in Chicago and Priyamvada C in Bengaluru; Editing by Caroline Stauffer and Deepa Babington)