Lenders rush to construction loans on struggling asset classes, when they still can – Commercial Observer

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Colorado Springs, Colorado, emerged this summer as one of the country’s hottest hotel markets.

The city, nestled southeast of the Rocky Mountains about 70 miles south of Denver, followed only the Florida Keys and the Gatlinburg and Pigeon Forge areas in eastern Tennessee as one of three leisure destinations with the highest hotel occupancy rates in July – 84.4%, according to hotel market research firm STR.

To hell with the pandemic, people have flocked to “Olympic City USA”. Colorado Springs Airport saw a more than 30% jump in passenger numbers through the airport in July, compared to the same month in 2019, according to the Rocky Mountain Lodging Report, a monthly report on the multi-hotel hotel market. – Reports compiled by industry trade groups. .

Arron Duff, manager of The Antlers-branded Wyndham hotel in Colorado Springs, told a local Fox news channel in July that with increasing travel and hotel bookings, people are staying longer.

“Our occupancy rates are at 100% not only Thursday, Friday and Saturday, as was the case before, but we see staying until Sunday, Monday and Tuesday, which is really good,” he said. Duff told Fox21 News.

Just in time, it seems, the first Marriott International-branded long-stay hotel in downtown Colorado Springs is set to open next spring, thanks to a $ 55.6 million construction loan. from Dallas-based private hotel construction lender HALL Structuré. Finances (HSF). The project will be a Marriott SpringHill Suites and an Element by Westin extended stay hotel, with the developers looking to marry two concepts in order to capitalize on the variety of trailblazers heading to the city.

“Our phrase here is, ‘Make hay now,'” HSF president Mike Jaynes said of the hotel building loan. “We try to create as much as possible on well-designed projects, because we could have a lot more competition in six, 12 or 18 months.”

Jaynes’ sentiment towards the opportunities for hotel construction loans is shared by a number of private middle market lenders who have benefited from the withdrawal of the wider lending community from funding these hotel and property loans. Potential retail businesses – two types of assets that have been hit the hardest by the pandemic. The U.S. hospitality and retail markets are far from completely healed, but budget, limited-service, select hotels and open-air malls filled with credit tenants have all been resilient for the past three months. pandemic and have become prime performance targets for greedy lenders.

“Now that things are sorted out [with the pandemic], we are very active and are looking for [hotel] opportunities, ”said Jaynes, whose company is targeting a return of over 9 on hotel debt. “This is a good time to get heavily involved on the construction side with the hotels – we are looking at 15 to 24 months to build a project. If a well-designed project comes to us with multiple demand drivers, and it’s in a good growing market, we’ll look and see what the trend was up to 2019, and on that basis, we [calculate] what is the overall opportunity for the project that awaits us.

“We like the idea of ​​providing money up to 75% loan on what will be the newest product on the market, with, in most cases, a very strong flag behind it as well,” added Jaynes.

Alternative private lenders who spoke to Commercial Observer are looking at the most basic aspects of a stable hotel construction loan opportunity. They want strong sponsors, with “deep pockets,” who are building in-demand types of hotels backed by top hotel brands in the best post-pandemic, road and leisure destinations, according to the president and CEO of ‘ACRES Capital, Mark Fogel, whose group recently funded a construction loan to complete the Canandaigua Hotel, a Hilton Tapestry Collection hotel on the shores of the Finger Lakes in Canandaigua, NY

“[Today, I want a] a lot more skin in the game, ”Fogel said, adding that his company was targeting a debt yield of over 10% on a stabilized basis on hotel construction loans. “[Where my] the loan / cost ratio could be 75 to 80 percent before [the pandemic], now 65% is the highest possible level. During the pandemic, it was clear to me that the people who had more equity at stake were keeping their agreements and strengthening them. And with this double dip with the delta variant – who knows, we could have a triple dip – [we also] be sure to include plenty of interest and operating reserves.

ACRES is currently exploring hotel construction loan opportunities on properties in Traverse City, Michigan, Sarasota, Florida, and the East End of Long Island, NY, with locations including Charleston, SC and Nantucket, Mass., being the priority. also for the company.

“You have to have a market where average daily rates and occupancy rates make sense for hospitality and are not over their skis,” Fogel said. “My subscription is not going to assume that they will outperform the current market.”

Private lenders, of course, enjoy greater flexibility than regulated banks, most of which – led by regional banks – are gradually re-entering the credit markets in significant ways, accepting refinancing and acquisition loans. , which bodes well for those who lend. on construction site.

“Any source of capital [retail or hotel construction] has no inheritance or disputed assets, ”a US head of commercial mortgage loans from a major national bank told CO on condition of anonymity in order to avoid any internal conflict over the speaking out. public. “Any debt fund that has started finding good, cheap assets should be new money. Banks do not want to increase their exposure in these areas. [The only reason a] the commercial bank would lend on the retail business and the hotel because its book is clean; this is the only situation where more capital would be intuitively allocated to these areas.

It remains to be seen how long the window will remain open for private lenders to take advantage of an abundance of hotel construction opportunities, but these lenders are confident knowing the market will be there for their exit strategy.

“We feel comfortable just because there is so much dry powder coming from funds seeking to finance completed projects, and as banks get more involved, it will widen that funnel, as well. say – whether it’s a bridge or a more permanent scenario, ”Jaynes said. “We have had a number of projects that paid off this year with private debt funds.”

As the hotel construction market has grown stronger, retail has been much slower and lenders are approaching it with caution.

“Yes [we’re talking] construction loans on retail, I would like it to be pre-leased to, like, a Trader Joe’s; I wouldn’t do multi-tenant retail, ”said the head of the US real estate bank. “But, big box retail is obsolete right now, and most of it will have to be reused. The whole retail landscape needs to be reset.

The mall space is still in turmoil, despite the reopening. Values ​​have experienced sharp declines; banks and special services sell distressed real estate malls because they are not involved in exploiting assets; and many owners of Class B malls are trying to invest in capital improvements, or renovate or demolish and rebuild for new use, according to market commentary from a Newmark retail professional which was shared with CO.

Fogel said ACRES would only do pure construction for retail “if it is at least 50 to 75 percent pre-lease, with some kind of credit lease as the point of departure. anchoring, with a sponsorship that includes what they do and in a place with liquidity, “Fogel said.” We need to know that there is a liquid market for our assets once the projects are built. ”

ACRES is currently considering an opportunity around a constructed and operational shopping center in South Florida that has zoning rights that would allow the construction of approximately 3 million square feet of additional commercial space and 10,000 residential units.

“To me, this is the most attractive retail offering, to fundamentally,” said Fogel. “It’s good location and you have cash flow there – about $ 4 or $ 5 million from tenants in place – but it’s really covered land, where our borrowers go out there and use that cash flow. cash to pay us, while making preparations. -development work to determine what they will do with individual plots, if they will build multi-family homes, keep a few businesses or [introduce] another type of component.

“Many of these shopping malls [and malls] are in some of the best places in their markets, and being able to create some sort of adaptive reuse for those properties is like gold, because you buy them on the cheap and develop them into something, on a big lot. , which could be a better use for the property, ”added Fogel.

Open-air malls are where pure retail finance has really taken hold, mostly in the form of acquisitions and ongoing finance, driven by rental quality as some traditional shopping center tenants seek out. open-pit locations, according to Brian Harper, president and CEO of RPT Realty, a publicly traded retail REIT.

The US banking executive who spoke to CO anonymously said it was “Whole Foods, Wegmans, Trader Joe’s and [all these who are] using the Amazon [delivery] concept for brick and mortar ”, becoming truly omnichannel, like Best Buy, which has become the main attractions of lenders.

“Overall, the open-air lending market is very healthy, which has led to a compression of cap rates, as there is currently a lot of competition in the market, with 1031, REITs and pensions, ”Harper said. “It used to be a shed and bed story, and now the investor world is looking for more yield, and luckily with the open air this is one of those areas where the tap has been turned on to investment. “

Mack Burke can be contacted at [email protected]


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