Hospitality & Tourism

Hotel financing becoming a challenge in the post-pandemic economy

By Hunter Turpin

Aug 15, 2023 3:21 pm

Iron Horse-062022-MMeyer — The Iron Horse Hotel in Milwaukee.

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Colliers | Wisconsin Hospitality Marketers International Doug Nysse Greg Hanis

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Two prominent Milwaukee hotels are in financial trouble: The 138-room Hampton Inn & Suites downtown has been returned to its lender after unexpectedly closing this spring and the 102-room Iron Horse Hotel in Walker’s Point is headed to auction to resolve bankruptcy. While these two properties each have a unique set of circumstances, industry experts say

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Two prominent Milwaukee hotels are in financial trouble: The 138-room Hampton Inn & Suites downtown has been returned to its lender after unexpectedly closing this spring and the 102-room Iron Horse Hotel in Walker’s Point is headed to auction to resolve bankruptcy. While these two properties each have a unique set of circumstances, industry experts say that new challenges in hotel financing are weighing heavily on hotel owners and developers as the hotel industry — and the economy — recover from the COVID-19 pandemic. “A Hampton Inn by Hilton shuts its doors. That’s very unusual, but is that the tip of the iceberg?” said Greg Hanis, hotel industry analyst and president of New Berlin-based Hospitality Marketers International Inc. The first problem hotel owners and developers are facing, like many industries, is rising interest rates. Before COVID, many hoteliers signed five to seven-year commercial loans with interest rates closer to 3%; those rates have risen to 8% or even 10%, according to Hanis. “When you start adding on five, six, seven points of interest to a $10 million loan, it is a big hit,” Hanis said. For example, if a hotel owner has a $10 million loan that has seen a 5% increase in interest, that's $500,000 more in interest every year. A hotel with 140 rooms at $140 per night would need to put the revenue from the first 10 rooms it rents every night just to pay for the additional interest cost. Therefore, if that hotel is operating at 70% occupancy, the average in Milwaukee last July, occupancy has in effect dropped to 63%. The second problem is that many lenders are still hesitant to lend to hoteliers. “(Lenders are) thinking, ‘Let’s make sure the hotel industry is still viable enough to recover,’ particularly seeing that we’re dealing with inflation, we’re going into an election year next year, there’s a lot of question marks out there,” Hanis said. Things are trending in the right direction for hotels as tourists and large conventions and events continue to return, but the added financial stress from the pandemic, inflation and labor shortages are causing turbulence for some hotel owners across the country. “(As hotel's finances become more stressed) the options for owners and developers are to walk away or come up with more equity,” said Doug Nysse, hospitality industry advisor and director of project and development services with Colliers International | Wisconsin. [caption id="attachment_570160" align="aligncenter" width="1024"]

The Hampton Inn & Suites Milwaukee Downtown hotel, located at 176 W. Wisconsin Ave., has shuttered indefinitely.

The Hampton Inn & Suites Milwaukee Downtown hotel, located at 176 W. Wisconsin Ave.[/caption] Given these trends in commercial lending, Hanis and Nysse think some hotels may end up in similar situations to the downtown Milwaukee Hampton Inn and the Iron Horse. “There are hotels right now that are operating, they’re doing fine, but they have this cloud in the background,” Hanis said. “We may never see those issues become public, though, if those owners can resolve refinancing themselves,” Nysse added. In the case of the downtown Milwaukee Hampton Inn and the Iron Horse, there may be no shortage of buyers as court filings say there are upwards of 2,400 interested investors for the Iron Horse and the Hampton Inn is backed by a stable brand and a prime Westown location. “There’s always a market for hotels that go on the market. Now, one of the problems will be the age of the hotel, the condition of the hotel,” Hanis said. The Hampton Inn initially opened as a Howard Johnson Inn and Suites in 2000 after a 10-story vacant office building was renovated. It was remodeled and converted to a Hampton Inn in 2006. When the property is sold again, it will need a significant investment to keep the Hampton Inn brand, according to Nysse. During the pandemic, lenders allowed hotel owners to use FF&E reserve funds, which is money set aside for making capital improvements, for other expenses. “If hotels used that money to otherwise pay down debt during the pandemic, then there’s no money left to refresh the hotel," Nysse said. "As a result, when the brands start to force the hotels to make those upgrades and there’s no money there, the hotels can’t do it.” While that isn’t necessarily what’s going on at the Hampton Inn, it resembles what’s happening nationally, Nysee said.