INVESTMENT
leverage points . We ’ ll also see a significant amount of high-rate preferred equity layered into deals for sponsors to close on a transaction .
H : How would you describe the state of CMBS ? DAVIS : Hotel CMBS credit spreads continue to be extraordinarily wide , near post-COVID peaks . While that market is open , CMBS lenders will not take any principal risk so borrowers literally will not know their pricing until the deal closes and the bonds are sold . This dynamic makes it difficult to rely on CMBS for an acquisition , unless the bank is willing to provide a firm commitment . However , in the current environment , my sense is that the banks will avoid issuing a firm commitment unless it ’ s for their best clients , and even then , the commitment will contain a significant amount of pricing flexibility . TARPEY : With the state of the market owners need flexibility . I don ’ t see any reason to consider locking in CMBS at these levels .
H : How are higher rates impacting lender selectivity ? DAVIS : Lenders have become much more selective , particularly the banks . Bank loans are the hardest to obtain in the current market and most banks are focusing on existing clients and / or their best clients . We ’ ve been told by at least one major hospitality bank lender that they are pausing on new hospitality loans for the time being . Because some of the banks are slowing down , it has caused many of the debt funds to slow down because they rely on the banks for credit lines and for syndicating senior loans . Bank selectivity has definitely had a ripple effect on the broader hospitality lending universe . FAREED : For many of our clients , it ’ s becoming a search for the most creative lender who has a strong understanding of the industry and some flexibility regarding
where they are willing to sit in the capital stack . For this reason , private lenders are becoming more and more attractive . We have encouraged our clients in need of capital to move quickly , try to stay ahead of rate hikes , or even go back to their current lenders to try to secure an extension . TARPEY : I see sponsors focusing on existing lender relationships , who have successfully executed on business plans together . This is not the market to get cute and over shop financing .
H : How high will rates go , and for how long ? DAVIS : We could easily end this year with 6.5 % to 7 % rates for low-leverage bank deals and high single digit rates for all other deals , which are coupons that we haven ’ t seen since the dark days of the global financial crisis . I do believe that credit spreads will begin to compress quickly after the Fed has phased in the rate increases this year .
Most of the debt fund lenders are solving for absolute returns and as the index goes higher , they can hit those returns through the index and with lower credit spreads .
The markets are forward looking
RISING CONSTRUCTION AND FINANCING COSTS AS WELL AS SUPPLY CHAIN ISSUES ARE DAMPENING PIPELINE GROWTH FOR PROJECTS IN EARLY PLANNING STAGES , ALTHOUGH MOST HOTELS UNDER CONSTRUCTION ARE HIGHLY LIKELY TO OPEN EVEN IF ON A MODERATE MULTI-MONTH DELAY .
– C . PATRICK SCHOLES , TRUIST SECURITIES
and once there ’ s a sense that inflation is under control , credit spreads will come in meaningfully and we will return to a more normalized loan coupon environment , even if the index remains high . TARPEY : The only thing we know is rates are not going back down in the near term . As a buyer , focus on a cost basis that you ’ re comfortable owning through any environment . FAREED : We expected the Federal Reserve to raise rates by another threequarters of a percentage point , if not a full point , in late July . Hopefully , that will be the end of it for this year , which would allow a clearer picture of its impact on inflation before taking further action . Seeing the landscape beyond that , in terms of how high rates may go , or for how long , isn ’ t possible in the current environment .
H : Where can high rates create an advantage , and for who ? DAVIS : The high rates create an advantage for REITs and high net worth capital , which groups are not necessarily reliant on the mortgage financing market to acquire assets and / or achieve their targeted returns . The flipside is that REIT share prices are down ,
42 hotelsmag . com September 2022