Hotel debt markets improving as major lenders return to market

With many major lenders returning to the market, JLL’s hotel investment banking team recently released its Hospitality Debt Market Commentary to provide insights on the state of the market and identify positive trends.

“We’ve been pleasantly surprised by the rapid recovery of the hospitality debt markets over the past several months,” said Senior Managing Director Kevin Davis, who leads JLL’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.”

As the lodging industry continues to head down the road to recovery, JLL’s hotel investment banking team is ramping up its efforts, being actively engaged on more than $2 billion in financing assignments, as the hospitality debt market is showing a strong resurgence.

Among the findings of JLL’s report:

Debt funds are the most active lenders, followed by banks, insurance companies and CMBS, which still remain selective for high-quality assets. There are also significant spread comparisons with the debt funds, with bank spreads remaining steady since fall 2020. Additionally, the banks continue to provide the lowest cost of capital, however, its pricing advantage has narrowed as debt fund spreads have compressed.

There is greater liquidity for acquisitions or cash-in refinancings. And while debt funds prefer to quote acquisitions, most are also actively quoting refinancings.

Leverage levels have increased as banks and insurance companies are willing to push leverages to 55-60%, which is up from 50% in fall 2020. The debt funds are also willing to push leverage to 75-80% for the best, high-quality assets.

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

In select states, retroactive CPACE financing represents a creative source of capital for recently developed or renovated hotels.

“Despite on-going 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 Mike Huth, an EVP with JLL Hotels and its investment banking team.

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