How Tightening Banking Restrictions is Impacting US Hotel Developers

Banks’ tough lending standards make it difficult for US hotel developers to secure financing for their projects, slowing new hotel construction just as Americans’ appetite for travel is ripening.

Hotel developers, private equity firms and contractors told Reuters that financial pressures on regional banks, which are the biggest lenders to hotels and other commercial real estate markets, have forced developers to delay projects or find other innovative ways to raise capital.

The plight of the hotel sector highlights the impact of the regional banking crisis on the broader US economy, which led to the failure of 3 medium-sized US lenders and prompted a flight of deposits to larger banks.

And after the collapse of the “Silicon Valley Bank” last March, the “Shop of Reality Investments” company was suspended.Shopoff Realty Investments in California Building the “Las Vegas Dream”Dream Las Vegas, a 21-story hotel, resort and casino, said the company was trying to secure more financing.

Since March, 59 of the 98 US hotel projects that started or were in pre-construction this year have been put on hold, according to previously unreported data shared with Reuters by Build Central Inc. A subscription-based research and analytics company.

In the context, Joseph Delle Santi, chief investment officer of MCR Hotels, explains, “Regional banks that used to be active for us 9 to 12 months ago have not appeared in hotel financing for us today,” which is the third largest owner and operator. For the US hotel brands “Hilton”.

James Hansen, executive vice president of business development at hotel development and operation company Hotel Equities, said that over the past year, access to loans and high construction costs have delayed projects across Florida, Texas and California, adding that regional banking unrest has prolonged the project. Waiting for approvals for construction loans.

Chief executives of major hotel companies, such as Hilton Worldwide Holdings and Marriott International, have also alluded to the problem, warning of a decline in hotel projects as credit becomes more expensive and less available in recent earnings calls.

Analysts consider that the slowdown in hotel development will also reduce the profits of blue-chip manufacturers, such as Caterpillar, whose commercial real estate customers account for about 75% of construction sales, while customers decline to buy equipment, 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 considering reducing their exposure to commercial real estate by tightening lending standards and offering lower loans.

Hotel developer and president of the National Association of Hotel Owners, Operators and Developers Andy Ingraham said that as lending standards became more stringent, smaller hoteliers without existing lending relationships began to overcome hurdles, adding that he and other members were struggling to obtain financing for various projects.

In this context, he says Ivins Charles, CEO of Fruiter Development and Hospitality GroupFrontier Development and Hospitality Group (a Washington, D.C. developer whose portfolio includes 10 hotels) said that in some cases, private equity firms have stepped in to fill financing gaps for construction loans, but at higher costs.

He added, “I hear about interest rates between 9 and 10 percent, compared to 4 percent two and a half years ago.”

Small and medium-sized banks, including lenders with less than $250 billion in assets, hold nearly $2.3 trillion in commercial real estate loans for structures such as offices, hotels and warehouses, which is 80% of their total liabilities.

Exposed regional banks are now offloading commercial property loans at a discount. Troubled regional lender PacWest Bancorp announced in May that it would sell $2.6 billion worth of construction mortgages.

Banks began shrinking their hotel loan portfolios in the first quarter of 2023, according to an analysis by S&P Global Market Intelligence, based on available data from regulatory filings. The study showed that 14 of the 24 banks with more than $125 million in outstanding hotel and hotel loans, posted a quarterly decline.

(Reuters, The New Arab)