Confidence In Hospitality Is Slipping. How Can Developers Find The Financing They Need?
Despite strong hospitality numbers in 2019, hotel developers may need a pep talk heading into 2020.
The U.S. hotel industry reported record-breaking performance numbers last year. In 2019, average daily rates increased by 1% and revenue per available room, or RevPAR, rose by 0.9%. Despite these numbers, STR and Tourism Economics, the benchmarking group many lenders use to determine how they should loan to hospitality projects, downgraded its 2020 forecast for U.S. RevPAR growth.
Many hotel developers have been left wondering if they will be able to secure financing for upcoming projects. But if developers do their research and find the right partner, they may still be able to find the capital they need.
“There are many types of lenders out there today that can provide creative financing for hospitality projects,” said Lori Tirado, managing director of business development at Access Point Financial, an Atlanta-based hospitality lender. “The key is to clearly lay out your goals for the future and find a lender that shares your vision.”
Bisnow recently sat down with Tirado to learn about the RevPAR downgrade and what steps hotel owners and developers can take to keep their projects afloat and boost their revenues in 2020.
Bisnow: Why is RevPAR so important?
Tirado: RevPAR can be an indicator of a hotel’s performance and whether it is able to fill its rooms. RevPAR isn’t a perfect measure of success, however, since it fails to take into account the size of a hotel. A hotel could have a lower-than-average RevPAR but still boast plenty of rooms that bring in higher revenues.
Bisnow: Why did STR downgrade RevPAR?
Tirado: RevPAR grew in 2019 because ADR rose, which I believe will continue to be a driver of growth in 2020. The reasoning behind STR’s decision is that hotel supply has been outpacing demand and occupancy has been somewhat flat. Supply growth was relatively modest in 2019 at 1.9%, and projections are the same for 2020.
However, many markets are feeling the effects of new supply coming online, which in some instances is outpacing demand. Also, as the country’s GDP growth slows, RevPAR may start to fall. Some major markets have seen a slip in occupancy, making hoteliers reluctant to raise room rates, furthering the slip in RevPAR.
Bisnow: Is this changing how Access Point lends?
Tirado: When we examine an owner's pro forma for their hotel, we will look more conservatively at their projections and be mindful of how the hotel industry operated in the past few years. We will also analyze how each project’s competitive set performed and be more cautious with our lending practices. This could come in the form of a slightly lower loan-to-cost ratio than we have typically allowed for in the past.
But not all markets are slipping. For construction lending, we plan to dive deep into the market. Growth in RevPAR has continued for many larger cities, and we do not want to have tunnel vision when we hear about these economic generalities.
Bisnow: What advice do you have for developers seeking hotel financing in 2020?
Tirado: There are many types of lenders out there today that can provide creative financing for your projects. Determine what is important to you. Can you sacrifice on rates for better terms, nonrecourse or increased flexibility? Does a short-term loan or long-term loan make more sense for your business plan?
Borrowers often overlook shorter-term, higher-interest rate loans, but these loans can often fit into your business plan and be more attractive than financing with a traditional lender. Factors such as the speed of execution and higher leverage can offset the higher yield by improving cash flow quicker and save the borrower from having to seek very expensive equity. At times, equity investors require more control and at higher returns than debt.
Bisnow: How will the RevPAR decision affect how banks lend?
Tirado: Banks are typically very regulated. When changes occur in the market, such as the downgrade of RevPAR, they typically become more conservative in their approach to hotel lending across the entire market.
Since hospitality is our only vertical, we have the ability to better understand each hotelier’s story and do not make those generalities. We may ask more questions than a bank to ensure we have a complete sense of what the hotel owner is trying to accomplish. We can get creative and be flexible in our approach in order to help our clients meet their goals.
This feature was produced in collaboration between the Bisnow Branded Content Studio and Access Point Financial. Bisnow news staff was not involved in the production of this content.