Hotel Debt Markets Improving

(Mariott Marquis San Diego.)

The hospitality debt market is showing a resurgence as the lodging industry continues to recover, said JLL, Chicago.

“We’ve been pleasantly surprised by the rapid recovery of the hospitality debt markets over the past several months,” said JLL Senior Managing Director Kevin Davis, who leads the firm’s investment banking team. “The increased liquidity and lower cost of debt capital should be a strong catalyst in the recovery of hotel asset values and should drive significant hotel sales activity.”

STR, Hendersonville, Tenn., said weekly hotel occupancy jumped nearly seven points from the prior week to the highest point in more than a year. Average daily room rates have improved significantly from March 2020 and even reached 81 percent of their 2019 benchmark.

JLL reported debt funds are the most active hotel lenders at the moment, followed by banks, insurance companies and commercial mortgage-backed securities lenders, which still remain selective for high-quality assets. There are significant spread comparisons with the debt funds, with bank spreads remaining steady since fall 2020. Banks continue to provide the lowest cost of capital, but their pricing advantage has narrowed as debt fund spreads have compressed.

There is greater liquidity for acquisitions or cash-in refinancings, JLL said. And while debt funds prefer to quote acquisitions, most will actively quote refinancings.

Leverage levels have increased as banks and insurance companies are willing to push leverage to 55-60 percent, up from 50 percent last fall. Debt funds are also willing to push leverage to 75-80 percent for the highest quality assets.

So-called “drive-to-leisure” resorts and trophy/luxury asset types are in highest demand, JLL said. Financings for these asset types generate the most attention, followed by high-quality assets in good, long-term markets at a modest loan basis.

“Despite ongoing pandemic-related challenges, there are compelling reasons to be optimistic about the outlook for the lodging sector as we move deeper into the year,” said JLL Hotels Executive Vice President Mike Huth.