Hospitality financing has traditionally been an outlier in commercial lending portfolios. Hotels don’t have the same long-term certainty as other CRE loans; the daily nature of their revenue is more unpredictable, which can give lenders pause. However, U.S. hotel occupancy is projected to reach record levels again this year, marking a ten-year uptick. According to a forecast from CBRE, a real estate and investment firm, occupancy will rise to 66.2 percent in 2019, fueled by a 2.1 percent bump in demand, and offset by a hotel supply increase of 1.9 percent.
The sheer size of the hotel industry must also be considered in its potential. STR’s 2018 HOST Almanac reported that U.S. hotel industry revenues topped an estimated $208 billion in 2017. Lending projects including new construction as well as renovations and brand conversions totaled $42 billion in 2017. Last year’s numbers, which will be reported in a couple of months, are expected to show continued growth.
Experts agree that hotels haven’t hit the top of this economic boost yet; they will likely have another couple of years of growth, bringing plenty of opportunities for lenders. New construction supply will even out and lending activity will shift to renovation and brand conversion projects as existing hotels work to stay competitive. Borrowers who have completed construction projects will also look for take-out loan options. And, more borrowers will turn to debt-like equity with their capital stack structure to achieve a more favorable loan-to-cost ratio – examples include FF&E loans, EB5 debt, C-PACE financing, mezzanine debt, preferred equity, common equity, and crowdfunding.
Meeting the demands of hotel lending requires a specialized understanding of the market and a funding process that is more detailed than a traditional business loan. For starters, hotel loans are much larger than other commercial loans. There is also a human element to hotel lending that needs to be considered, a deeper story and personal need behind every loan request. That $42 billion loaned in 2017 considered all these factors, and it was accomplished almost completely offline through phone calls and emails. Hotel loans were taking an average of 3 to 4 months to close. Thanks to an increased comfort with digital offerings, the industry has been able to improve the borrower application and underwriting process – streamlining the many nuances of the workflow that remained largely unchanged up to this point. The typical time spent processing a hotel loan can be cut by at least 50 percent with modern portals and workflows. The efficiency savings allow lenders to grow without adding resources; in effect, lenders can double their closing rates without adding costs.
More lenders are investing in tools that make pre-qualifying leads easier as well. Better workflows to identify and analyze loan requests ease the burden of identifying new deals that fit a lender’s unique criteria. And, the entire process is continuing to mature. Private and personalized offerings are emerging to enable borrowers to better know their lenders, providing a confidence the lender will close the deal. Also, AI will soon begin to offer new operational efficiencies, resulting in improved portfolio performance.
Hotel lending is one of the more successful lines when evaluating total return and customer profitability. Positive economic factors, combined with new efficiencies realized from major technology advancements, are giving lenders the confidence to increase their investments in this sector. Its high rewards can be a strong addition to any lending portfolio. In boom times for the hospitality industry, lenders must make the most of the many opportunities awaiting them. It’s time to take advantage of the latest tools to close more loans, faster. Hotel lending is a smart vertical for financial institutions that can structure their application and funding process to lessen the risks involved.