CAPITAL MARKETS SNAPSHOT
- Haven For Spread Lenders – Hospitality continues to gain favor among balance sheet lenders and is becoming an essential part of a loan portfolio. This increase in allocation is being driven largely by the lending market’s current competitiveness within the main food groups. Furthermore, numerous recent hospitality financings have been provided by regional banks and international finance companies that are new to the sector.
- Resilient Securitization Market – Despite the Fed’s comments earlier this year which sent the 10-year Treasuries as high as 2.99%, CMBS volume continues to be robust. CMBS volume is projected to total $76 billion in 2013, up from $44 billion in 2012. Hotel loans represented about 22% of total CMBS on a YTD basis, up from 16% last year.
- Continuation of Robust Transaction Market – A strong credit environment and plenty of “dry powder” has continued to favor sellers. The imbalance of quality deals and available capital is driving cap rate compression and forcing equity and debt alike to move further up the risk spectrum. We anticipate sectors such as resorts and secondary market construction to be an emerging lender focus.
BALANCE SHEET TRENDS
- The New Hotel Lenders – Consolidation in the regional bank market, driven by failures and subsequent acquisitions of smaller banks, has created a new class of lender whose cost of capital requires a focus on higher-yielding assets. International finance companies (ie non-US life co.) have also increased recent activity in the hotel sector, but their most competitive bids have focused on bridge/transitional financings in top tier North American markets.
- Construction Activity – As lodging fundamentals continue to improve, new supply follows suit. Project financing is being led by regional and local banks with the bandwidth and infrastructure to service a construction loan. The majority of construction lending today is partial to full recourse (25%+) with a preference for experienced project teams. There is also a notable gap between pricing from banks (~L+250 to 350bps) to the next source of construction capital – debt funds (8%+).
- Money Center Banks – Coming out of the last downturn, money center banks had a “first to market” advantage and were able to profit from making solid hotel loans and assuming sizable market share in a recovering market. These contrarian lenders are now slowing down activity with new borrowers and focusing on business with existing clients. While they are still active in the market, we have seen many of these large institutions become more selective.
- Whole Loan Funds – Over the last 18 months, we have seen an increasing number of firms raise debt funds designed to be a “one-stop shop” for borrowers. These platforms typically quote senior and mezzanine spreads on a blended basis and will sell the senior positions post-closing. These players, such as H2 and Alliance Bernstein, are typically focused on larger transactions with sizable mezzanine tranches and offer all-in rates in the mid-single digits.