INVESTMENT
WHEN WILL THE financing markets improve ?
IF HOSPITALITY FUNDAMENTALS REMAIN STRONG , WHEN INFLATION SUBSIDES , CREDIT SPREAD COMPRESSION COULD BE SIGNIFICANT .
Contributed by KEVIN DAVIS , AMERICAS CEO , JLL HOTELS & HOSPITALITY GROUP
Since the Federal Reserve began tightening monetary policy in March of 2022 , hotel financing costs have ballooned by 500-600 basis points , resulting in prevailing loan coupons of 7 % to 10 % or more . We ’ ve seen a significant increase in both components of the loan coupon — the index and the credit spread — with the index going from 5 bps early in 2022 to 3.79 % in mid-November 2022 , coupled with a 100-200 bps increase in credit spreads .
In prior recent tightening cycles , we ’ ve generally seen credit spreads compress when the Fed has begun raising interest rates , resulting in an offset to the rate increase . However , this cycle is different because of the presence of inflation , which erodes the value of most loans , and the Fed ’ s aggressive ( albeit late ) attempt to get rid of it , which has triggered concerns about a recession .
As a result , lenders / loan investors are pricing in dual risks — inflation and recession — which have caused credit spreads to gap out even as the index has increased . Perhaps most frustrating for hotel investors is that the spread expansion is occurring amid rapidly improving hospitality fundamentals . Nevertheless , we are in a market where the macro fundamentals are driving the credit markets more than sector performance .
Despite the challenging capital markets environment , lenders are
52 hotelsmag . com Jan / Feb 2023