Analysis: US hotel developers run out of cash as construction lending dries up

First Republic Bank

05/06/2023 16:59

(Adds comment from Western Alliance in paragraph 18)
    By Bianca Flowers and Priyamvada C
       June 5 (Reuters) - Tighter lending standards from
regional banks are making it harder for U.S. hotel developers to
secure funding, slowing construction of new hotels at a time
Americans' appetite for travel is ripe. 
    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 U.S. economy of the regional banking crisis, which
resulted in the failure of three mid-sized U.S. 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.  
    Since March, 59 of the 98 total U.S. hotel projects that
broke ground or were in the pre-construction phase this year
have been paused, according to previously unreported data shared
with Reuters by Build Central Inc., a subscription-based
research and analytics firm used by some large hotel brands to
gauge market opportunities by location.   
    "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 U.S. 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 Inc  H.N  and Marriott International  MAR.O , 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 Inc.
 CAN.T , 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
 SIVBV.UL , Signature Bank  SBNY.PK  and First Republic Bank
 FRCB.PK , 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 D.C. developer whose portfolio
includes 10 hotels.
    "I'm hearing 9-10% (interest rates) and it's coming from a
4% environment two-and-a-half years ago," he said. 
    
    'SIT ON THE SIDELINES'
    Small to mid-size 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  PACW.O  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  WAL.N  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."  

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New hotel projects vs cancellations in the US    https://sphinx.thomsonreuters.com/graphics/#/graphic/byprlwwnkpe
US banks with large hotel loans reduce their exposure    https://tmsnrt.rs/43kmVdA
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 (Reporting by Bianca Flowers in Chicago and Priyamvada C in
Bengaluru
Editing by Caroline Stauffer and Deepa Babington)
 ((Bianca.Flowers@thomsonreuters.com;))