INVESTMENT
HOW FINANCING COSTS are impacting transactions
HVS BELIEVES THE CURRENT DISLOCATION IN THE CREDIT MARKET WILL BE SHORT- LIVED .
Contributed by BRAD HOBAN , EMIL ISKANDAR , HVS
Commercial real estate financing , particularly related to the hospitality industry , has been in a state of flux as the pendulum of the economy swings towards a correction . At the start of the year , many lenders were coming back to hospitality , and the general sentiment for both investors and lenders was bullish . In late February 2022 , the war in Ukraine drove increases in the prices of oil and goods that started to shift the global economic outlook , which many lenders and hotel investors cautiously watched , uncertain of the impact this would have on the U . S . economy .
Meanwhile , inflation in the U . S . was trending outside of the Federal Reserve target of 2 %. By January 2022 , inflation reached 7.5 % domestically , resulting in the Federal Reserve increasing the federal funds rate , which was near zero in January , by 25 bps in March . This rate hike would be the first of many implemented in 2022 , which , as of the most recent Federal Open Market Committee ( FOMC ) meeting on November 2 , marks six increases that totaled 375 bps in eight months .
In hotel financing today , lenders across the board are requiring higher debt coverage ratios than they were at the beginning of this year . Combined with the higher all-in interest rate for new loans , the higher coverage requirements result in loan proceeds coming in below borrower expectations . We have seen instances where buyers had to come in with more cash for down payment or owners had to inject additional equity when refinancing . Moreover , appraised values , being subject to a specific point in time , have declined given recent transactions with lower bid prices as buyers have attempted to solve for their targeted yields with consideration of rising debt costs .
We are currently in a period of price discovery , with a mismatch of seller expectations
58 hotelsmag . com Jan / Feb 2023