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Dealmaking Gets Delayed

Cautious Approach Defines Lodging Industry In First Quarter of 2019

Friday, March 15, 2019
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The lending environment in the lodging industry through the first six weeks of 2019 can best be described as ‘cautious,’ but many industry observers remain steadfast that hotel investment activity will pick up and more deals will get done as the year unfolds.

B.A. Spignardo, senior counsel, Shapiro, Lifschitz and Schram—who typically closes $150 million annually in commercial real estate transactions, including hotels, multi-family and office properties for the Washington, DC-based law firm—pointed out she likes the balance that exists within the current hospitality finance market.

“What I am seeing is both sides are kind of at the 50-yard line. It doesn’t seem like the type of environment where lenders have the power hand and they can pick and choose their projects. Lenders are trying to be active in the market, but obviously seeking deals that are the right fit and on the flip side it’s not a borrower crazed market. So both sides I think are cautiously approaching deals in 2019,” she said.

Spignardo continued, “I think that both lenders and borrowers/developers are running a marathon not sprinting. There’s not going to be a lot of big deals in the first quarter, but I think over the course of the year we will see money loosen up.”

She further noted that “there are not a lot of cookie-cutter deals, but there are deals to be done.” As such, Spignardo emphasized that lenders continue to get “creative” in trying to structure deals that will protect them, particularly as industry performance shows signs of weakening.

However, she noted that those efforts are sometimes met with resistance. “I see a lot of asks in terms of guarantees. Borrowers want non-recourse loans and banks want fully recoursed loans and there’s got to be some meeting of the minds,” she maintained.

In assessing the lending environment, Spignardo did acknowledge the impact of the nearly month-long government shutdown from January could be significant.
“I thought 2019 was actually going to be a great rebound year and that the hotel markets would see a lot of travelers and the government shutdown, especially in Washington, DC, has completely tempered my positivity,” she noted.

Spignardo elaborated, “There’s an absence of funds going to hospitality projects and banks I think took a real hard look at the shutdown and have thought about the effect on the hospitality market as a whole. I think there’s opportunity, but there will be a delay in when we see a healthy level of lending again.”

Spignardo also acknowledged a bit of a shift in recent months when it comes to loan-to-value ratios. “I do think there needs to be more equity put in deals. Loan to value seems to be a small gap between the two and lenders are cautiously accepting of different ways to bring equity into deals whether it’s through mezzanine or subordinate financing,” she stated.

In discussing some other hotel industry trends with regards to funding projects, Spignardo emphasized that she has observed a dramatic increase in the appetite for dual-branded hotel projects. “I think it’s great for a business person or travelers. You can really customize your experience and lenders are intrigued by it,” she noted.

Meanwhile, Spignardo confirmed that most of the hotel deals that she ends up finalizing include major brand flags. “Banks really like those deals because they have backing and reputation; there are very few unknowns. A bank knows what they’re going to get when they finance a loan that is secured by a Marriott property,” she said.

Nevertheless, Spignardo acknowledged the boutique or lifestyle movement bears watching from a lending perspective.

“There is an interesting turn that is coming into the market and that is hotels that maybe don’t have that major flag but are offering experiences or are really tech savvy that are trying to get into the market and get those dollars from lenders...So we’ll see if those types of hotels that don’t necessarily have the big name flag attached can become bigger presences in the hospitality market,” she said.

In looking ahead to 2020, Spignardo remained generally optimistic but did offer a note of caution, particularly when it comes to interest rates. “It depends on what happens with the Fed and that is so unpredictable right now. Creativity in the market is something we will definitely continue to see,” she concluded.
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