MANY ASSERT THAT INVESTING IN CAPITAL EXPENDITURES IS THE MOST POTENT LEVER A VALUE-ADD INVESTOR OR DEVELOPER POSSESSES TO ENHANCE THE RETURNS ON A HOSPITALITY INVESTMENT

– STEPHEN O ’ CONNOR ,

PRINCIPAL & MANAGING

DIRECTOR , ROBERTDOUGLAS

CapEx — or even a move to move properties to alternative franchise affiliations that require less CapEx .

FURTHER COMPLICATIONS Next , according to Goldman Sachs , in 2023-2024 , about $ 1.1 trillion of commercial real estate debt is maturing , of which about 10 % is for hotels . Also , given recent turbulence in the banking sector , 32 % of this maturing debt is reportedly held by banks , which are under pressure from regulators and tightening underwriting standards for new financing . Another 25 % of the debt has been packaged in the form of CMBS and sold to institutional investors , which is strictly governed by special servicers .

Long before the pandemic , non-bank lenders ( i . e . debt funds ) became more prominent sources of liquidity to the hospitality space , especially for riskier , value-add investments and new development . The market share of debt funds that demand high yields will

likely increase further now that the stocks of regional banks , traditionally an important construction lender for hotel developers , are experiencing high levels of stress . This can only serve to further curtail liquidity .

Add in material and wage inflation pressures on operating margins and the dramatic rise in the Federal Reserve ’ s benchmark lending rate pushing the resultant cost of floating rate debts ever higher , and we face a challenging market for hospitality lending and investment .

SOMETHING HAS TO GIVE The reality is that the owners of many hotels are not sufficiently well-capitalized to both meet the demands of securing refinancing for maturing debt and making overdue CapEx investments . In the scramble to refinance , not every owner will be successful . Many investors have already raised capital and are waiting to pounce should truly distressed situations materialize .

Is this the time that so many “ opportunistic ” investors have been waiting for ? Or , will borrowers and their lenders again find mutually beneficial outcomes that don ’ t involve bankruptcy and fire sales ?

Fortunately , hospitality is a favored commercial real estate sector at present as asset values are relatively high yielding and , thus , have the most cushion to absorb the current cost of market rate debt .

Though we don ’ t want to underestimate the financing challenges that await individual owners , we expect continued strong interest in hospitality investment opportunities , especially by well-seasoned , value-add investors .

As a result , we anticipate strong interest by both institutional and entrepreneurial investors in any under-capitalized properties with maturing debt and significant capital expenditure requirements that might otherwise make an opportunistic investor a fortune .

Jul / Aug 2023 hotelsmag . com 59