DALLAS — Change has been rapid and constant over the course of the COVID-19 pandemic, but as the Federal Reserve grows more aggressive in damping down inflation, experts say the past three months have been a period of particularly impactful shifts for the hotel industry.
"Rising rates have impacted the capital structures over — I would call it 90 days," said Angelo Stambules, managing director of Huntington National Bank's National Hospitality Group, during the "Capital and Strategies for Development" session at the 2022 ALIS Summer Update event in Dallas. "The supply chain, construction costs and inflationary pressures are certainly evident, and we're being very strategic in how we deploy our capital at the moment."
He said relationships and trust in sponsors of projects are more important than ever.
"We're going to be careful and measured in our approach, so really for us, it's about who we do business with more than anything else," he said.
Jared Schlosser, senior vice president of Stonehill Strategic Capital, said his company is still lending, but developers have become more cautious recently.
"We're still bullish on providing construction financings, but does the developer's budget pencil?" he said. "What does it look like today? I can't tell you how many projects in the last 60 days we've had where it's been pencils down because costs have gone up 25% to 30%, and borrowers come back to us and say, 'Hey, we need to see where this is going.'"
Asked whether the economy is headed to a recession, Schlosser said it feels like we're already in one.
"If we're not, I don't know what you call this time period where interest rates are jumping through the roof and construction costs are simultaneously jumping through the roof," he said. "If it's not a recession, it's surely not fun."
But while it seems like developers are taking a wait-and-see approach, Bobby Molinary, senior vice president of lodging development for Marriott International, said it's inevitable that they'll want to get back to business.
"I know that developers are resilient, and no matter what, they'll find ways to develop through recessions," he said.
He said even during the Great Recession, one of the deepest recessions on record, hotel developers wanted to do projects.
"One of the best attributes of developers is just being creative in finding ways to get projects started in good times and bad times," Molinary said.
Jim Chu, executive vice president and chief growth officer for Hyatt Hotels Corporation, said the hotel industry is far more prepared for a downturn than it was in the late 2000s.
"There has been more discipline over the last six or seven years than the period of five, six or seven years that led us into the Great Recession," he said. "So you won't see a lot of the carnage, if you will, that came out of that."
He did agree, though, that even projects continuing to move forward are doing so at a much slower pace.
"What was a six-month, 12-month or 14-month process of predevelopment is taking maybe double that," Chu said. "It just means you have to be committed to your project and make sure everything's in place. But, you know, we're not seeing a lot of things fall out [of the pipeline]. We're just seeing it take longer."
He said overall brands have had some attrition in their pipelines, which means the projects still there are for the more committed and experienced developers. He said developers have also been slower to sign deals with hotel brands.
"People are more cautious about signing management and franchise agreements, especially without the clarity of financing, and we as a general matter, don't count something in our pipeline until it's financed," he said.
Panelists said current loan-to-value spreads make financing more difficult, but when it will ease is anyone's guess.
Billy Brown, CEO of development company LodgeCap, said he has a hard time underwriting a project with loan-to-value ratios below 70%, but Stambules said Huntington is currently comfortable in the 55% to 65% range.
"Looking at the national bank landscape, construction lending is going to be a little bit more difficult, and I think leverage levels will come down a little bit just to reflect the risk that's associated with the potential," Stambules said.
Schlosser said Stonehill is "generally in that 70% range" and will go up somewhat "for the right deal and the right sponsor."
But he said the big determiner in getting things done is who is looking to develop and borrow.
"We've stayed active, and we're seeing really good projects with really good sponsors who are coming to us and saying, 'We believe in this project. We want to go, and we're really able to capitalize on the current market,'" he said.