place , but the further into 2022 we get , we may see lenders starting to lean into trailing 12-month operations as opposed to strictly proformas . As more properties stabilize , the permanent debt markets will need to come back to really help the refinance market kick off .
WHAT IS THE STATE OF THE FINANCING CLIMATE ( DEBT AVAILABILITY )?
Evan Hurd , Stephen O ’ Connor , RobertDouglas : The markets continue to improve and offer more liquidity every month , as many lenders have stepped back into the hospitality arena . We are also seeing a good appetite for taking on subordinate tranche capital positions .
Obviously , there is still concern over some of the property types and locations that haven ’ t fared well due to the pandemic , and related restricted corporate travel and conventions . So , lenders are still cautious with markets where equity investors are concerned about the recovery timeline . In that respect , hospitality is ahead of office product and retail in the investment pecking order . Multifamily and industrial remain favored property types with values bid up to the stratosphere .
Overall , we expect hotel lending to be still more disciplined coming out of the pandemic than what we witnessed after the recent Great Recession .
Eric Guerrero , HVS : It ’ s all there – conventional , bridge , CMBS , SBA , etc . Leverage is lower than pre- COVID and the borrower has to have a strong balance sheet .
Kevin Mallory , CBRE Hotels : High liquidity . The debt markets continue to demonstrate capacity combined with attractive terms . Lenders are becoming more selective within a growing market .
Emil Iskandar , HVS Capital Markets : Debt is coming back gradually with more stringent underwriting parameters . The positive news is interest rates remain relatively low compared to historical levels .
Lindsey deButts , Berkadia : We expect 2022 to be stronger than 2021 . We ’ ve seen many lenders take advantage of the yield they can achieve in the hotel space versus some of the more compressed and competitive asset types like multifamily and industrial . With refreshed allocations and a growing list of debt fund capital entering the market , more competition will help drive more favorable terms .
WHAT IS THE POTENTIAL IMPACT OF INCREASING INTEREST RATES ?
Evan Hurd , Stephen O ’ Connor , RobertDouglas : Most borrowing in the hotel sector is floating rate debt , so the overall cost of capital could eventually increase , in turn , dampening asset valuations , but first we expect credit spreads will compress a bit .
We think a greater concern , or existential crisis , for hospitality would be structural changes in business and group travel . No one knows for sure yet , but if this sector of hospitality only returns to 75 % to 80 % of customary activity , it would likely depress the valuations of those properties for the long term .
Ironically , city center business has traditionally been viewed as of lower
RIGHT NOW , MANY LENDERS ARE WILLING TO DE-EMPHASIZE 2020 PERFORMANCE , EMPHASIZING INSTEAD PROFORMA INCOME OVER IN PLACE , BUT THE FURTHER INTO 2022 WE GET , WE MAY SEE LENDERS STARTING TO LEAN INTO TRAILING 12-MONTH OPERATIONS AS OPPOSED TO STRICTLY PROFORMAS .
– LINDSEY DEBUTTS
investment risk than lifestyle and vacation properties . That might just flip .
Eric Guerrero , HVS : Traditionally , that would put negative pressure on value as buyers would need to meet their yield requirements . However , with all the equity chasing deals , I think that any increase in interest rates would simply lower the return requirements for buyers , because they will still aggressively compete to “ win ” deals and keep values high .
Guy Langford , Deloitte : Rising interest rates will take economics away from “ marginal ” deals – lower quality assets in second- and thirdtier markets . Cash flowing assets in key markets will attract good financing options .
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