continuing to make hotel loans , with varying degrees of participation depending on lender type :
• Banks are providing the lowest cost of capital , but are by far the most selective . In fact , a few banks are temporarily on hold for new loans until early 2023 . The banks that are lending are focused on the best deals with strong in-place cash flows and / or existing clients . Bank spreads are the most competitive and are generally ranging from the mid-200s to mid-400s , for leverage ranging from 45 % to 65 % loan to value .
• The debt funds remain relatively active , but they too have become more selective . Most debt funds are reliant on banks or the securitized market to finance their positions , and as those markets have become more challenged , it ’ s led the debt funds to increase pricing and selectivity . Debt fund spreads generally range from + 450 to 650 bps , an increase of 100-200 bps from earlier this year . We ’ ve also seen debt fund leverage come in by approximately 5 points , with maximum leverage now in the 60 % to 65 % range . Relative to other lender types , debt funds have the most flexible underwriting criteria . Unlike other lender types , the debt funds are less reliant on in-place cash flow . When underwriting a loan , the funds look at a combination of cash flow , loan basis , market and sponsorship to make a credit decision .
• Life insurance company lending has been fairly bespoke as several lifecos have targeted hotel financing programs that focus on certain property types , such as select service . The life companies are generally offering pricing between bank and debt fund pricing , with leverage of up to 60 % to 65 %.
• SASB CMBS , which has historically offered the highest leverage at the lowest pricing , has gapped out meaningfully with loan spreads that are in the low 400s and wider depending on leverage , in-place cash flow , market and sponsorship . Floating rate AAA spreads that we are observing represent post-COVID highs and are by far the widest levels that we ’ ve tracked going back to 2013 . On a recent hotel securitization , the AAA component of the cap stack was priced at + 300 bps , which compares to floating rate AAA spreads of approximately + 100 bps in January of 2022 .
• The construction lending markets continue to be highly selective and challenging as high construction costs have put downward pressure on leverage . Banks and debt funds have been the most active lender types in construction . Bank pricing is in the low 400s to low 500s for sub-55 % financing , while debt fund pricing begins in the high 600s , going into the high single digits for up to 75 % leverage .
We ’ re frequently asked when the financing markets will improve , and the answer is simple : once investors see a moderation in either inflation or recession risk , we ’ ll begin to see credit spread compression . We believe that inflation risk will be the first to subside and expect that if we have several benign inflation readings , we could see spreads come in during Q1 of 2023 . Also , as the capital markets environment improves , it will be more likely that risk will be priced based on hospitality fundamentals , which , if they remain strong , could result in significant spread compression in 2023 .
AS THE CAPITAL MARKETS ENVIRONMENT IMPROVES , IT WILL BE MORE LIKELY THAT RISK WILL BE PRICED BASED ON HOSPITALITY FUNDAMENTALS , WHICH , IF THEY REMAIN STRONG , COULD RESULT IN SIGNIFICANT SPREAD COMPRESSION IN 2023 .
– KEVIN DAVIS
Jan / Feb 2023 hotelsmag . com 53