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US Hotel Construction Projects Stall Over Dried-Up Finances

Victor Westerkamp
Victor resides in the Netherlands and writes about freedom and governmental and social changes to the democratic form of nations.
Published: June 7, 2023
Work crews construct a new hotel complex on oceanfront property in Encinitas, California, U.S., November 26, 2019. Image: MIKE BLAKE/Reuters)

Tighter lending standards from regional banks in the wake of the latest banking crisis have made it harder for U.S. hotel developers to secure funding, delaying the development of new projects.

Hotel developers indicate that the financial crunch that today’s middle and small banks — which are the most prominent financiers in terms of hotel and other commercial building markets — are currently going through has made it harder to get funds for their ventures, creating stalling and downtime in the real estate market.

Of the 98 development projects shut down this year, 59 of the cases occurred in March following the downfall of three mid-sized banks, Silicon Valley Bank, Signature Bank, and First Republic Bank, according to previously unpublished figures shared with Reuters by Build Central Inc., a subscription-based research and analytics firm used by some large hotel companies to study market opportunities by location. 

The hotel industry’s predicament highlights the vulnerability of the broader U.S. economy as an effect of the regional banking crisis, which led to a flight in deposits to larger banks. In contrast, many regional lenders began considering reducing their risk to commercial real estate by raising lending standards and issuing fewer loans.


“The regional banks that used to be active for us 9 to 12 months ago are not showing up to finance hotels for us today,” said MCR Hotels Chief Investment Officer Joseph Delli Santi, the third-largest U.S. owner-operator of hotel brands, including Hilton.

In the past year, tightness in the loan market and higher construction costs have led to the suspension of several projects in California, Texas, and Florida, said James Hansen, executive vice president of business development of hotel developer and operator Hotel Equities, where he added that the turmoil in the regional banking sector has led to longer wait times in terms of approving loan applications.

Slower hotel construction

According to observers, slower hotel construction will also hurt the profits of well-known companies like Caterpillar Inc., whose customers in the commercial real estate sector account for roughly 75 percent of construction sales. Due to the high-interest rates required to finance or lease manufacturing equipment, customers are minimizing their machinery transactions. 

In some instances, equity firms offered to fill the gap left by stagnant lending to finance construction projects. However, they did so at a higher price, said Evens Charles, chief executive of Frontier Development and Hospitality Group, a Washington D.C. developer in charge of 10 hotel firms.

“I’m hearing 9-10 percent (interest rates), and it’s coming from a 4 percent environment two-and-a-half years ago,” Charles said.

‘Sitting on the sidelines’

Small to mid-size banks, including lenders with less than $250 billion in assets, holds roughly $2.3 trillion in commercial real estate loans for structures like offices, hotels, and warehouses, the equivalent of 80 percent of their total liabilities.

Overexposed regional banks are now offloading commercial real estate loans at a discount. Troubled regional lender PacWest Bancorp announced it would sell $2.6 billion worth of real estate construction loans in May.

Banks started to reduce their hotel loan portfolios in the first quarter of 2023, an S&P Global Market Intelligence analysis found. Based on available data from regulatory filings, the study showed 14 of 24 banks that held more than $125 million in outstanding hotel and motel loans reported quarter-over-quarter decreases.

But the crisis is not from yesterday. During the lockdown period, considerable backlogs emerged in corporate supply chains, resulting in higher commodity prices, inflation, and ultimately higher interest rates, making borrowing money more expensive and less attractive.

“It’s getting harder to pencil in a good hotel deal,” said Mitchell Hochberg, president of Lightstone Group, a New York-based private real estate investor and developer with a $3 billion portfolio of hotel properties.

“A lot of developers would prefer to sit on the sidelines until rates come down rather than be burdened with the excess costs,” Hochberg added.

Reuters contributed to this report.