The hotel finance landscape is completely shaken up amid COVID-19. But it’s not all doom and gloom. With the right owner, asset, and location, deals will still take place across the country. However, the rules have all changed.

Prior to the outbreak of the coronavirus, the hotel industry boasted record occupancy and, despite a small downgrade in 2019, RevPAR was still trending upward. Now, with life as we knew it halted, hotel owners across the country are experiencing a dramatic decline in occupancy, with some hotels closing their doors and the industry radically changed for the foreseeable future.

Lenders are likely to show even greater caution when considering hotel investments going forward. They will be taking a hard look at every asset’s pre-COVID performance, how it is faring today, and what attributes, techniques, and resources it implements to weather the storm. Every lender is currently trying to determine what a stabilized asset will look like 12 months from now. With that in mind, expect more conservative loan-to-value ratios and potentially higher interest rates to account for additional risk, as well as more structure to mitigate current and future cash flow deficiencies.

For hoteliers looking to raise capital for their properties during this period, sponsorship will be of the utmost importance. Lenders will be trying to identify valid cap rates for specific markets, dramatically impacting a hotel’s value based on its location, and how well that destination fared during COVID. With a specialty lender at their back, hoteliers will be better positioned to identify opportunities for their property, if the circumstances align.

Once the market shows signs of rehabilitation and hotel statistics trend positively, hotel owners will still likely have access to a lower supply of capital than before. In this climate, the majority of investment activity generated will come from alternative lenders willing to take on additional risk. For hotel owners though that could mean more fees, increased rates, lower leverage and little to no leeway when things don’t work out. It’s likely that many of these opportunities will come in the form of floating rate bridge loans. Lenders will be selective in financing properties for hotel owners.  Some of the opportunities could come from hotel owners need to sell their property in order to recoup lost equity or if a hotel owner has a loan maturing in the near future.   

This painful period is not going to last forever, but it is unknown just how long it is expected to continue. Optimistically, hotel owners will begin the road to recovery by the third or fourth quarter of 2020, but it will realistically take three to five years to reach the level of occupancy and average daily rates the industry celebrated previously.

As travel begins to recirculate, occupancy will improve first, followed by gradual gains in ADR. Hoteliers need to align themselves with specialty lenders who know and understand their challenges and can recognize positive shifts in the industry as they occur.

It is difficult to say whether or not lending will return to the levels we saw leading up to 2020. However, hospitality is an adaptable industry rich with opportunities, and travel is not a commodity, it is an inevitability. Hoteliers will be forced to adhere to a new standard within the lending world, at least for a while. They should prepare to do so with a partner that understands their business. That way as the situation evolves, both parties can mutually adapt.

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Link to the rest of the blog series here.