A loan guarantee reduces the risk to the lender.
I got that part.
But what type of project is a risky investment, and how does that risk improve or worsen by industry?
It would seem to me that restaurants are extremely risky for financial institutions because of the competition level and time commitment involved for the borrower.
Of course, that assumption was proven wrong earlier this summer when I researched the topic and found that restaurants — full-service and limited-service establishments — were among the leaders in government-guaranteed loans.
So what about new hotels? Is there a scale to compare the two? Do banks compare hotels against small retail proposals or office buildings? What about industrial sites?
"Trying to compare to other industries is like comparing apples and oranges," said Andy Johnson, senior vice president and director of commercial real estate for Swatara Township-based Metro Bank. "It really is driven by demand."
Yes, banks evaluate their lending portfolio based on industry type, he said. But — at least in Metro's case — they are not likely to decline financing a great deal just because they already have funded 10 similar projects that year.
"Evaluating location is number one," Johnson said about hotels, followed by experience and credit history of the individual proposing the project and strength of the franchise they are considering. "It comes down to — does it make sense?"
Even then a loan guarantee — as we saw in Metro's recent Candlewood Suites deal with TecPort Hospitality LLC — is sometimes necessary. The backers of that project have purchased and built other hospitality properties in the region.
Economic conditions obviously have changed the lending process. Blending financing models that include government programs are popular with commercial developers.
"If (a project) needs a credit enhancement, we reach out to those programs and put them in," Johnson said, referring to the loan programs through the U.S. Department of Agriculture Rural Development and U.S. Small Business Administration.
I continue to come across stories that suggest lenders still like hospitality — regulatory issues have hampered new deals — and that hotel construction is making a turnaround in major and secondary markets.
A Wall Street Journal story last month, citing data from Lodging Econometrics, said construction starts for U.S. hotels during the past four quarters have been up 32 percent by room count from the same period a year ago. New project announcements were up 22 percent, the story said.
The reason: Lenders see hotels as being less risky today with occupancy and average rate growth on the rise.
"This year alone, they are expecting a 4 to 6 percent growth in occupancy in the Harrisburg region and 2 to 3 percent in average daily rate," Johnson said.
The location — the state Capitol drives a lot of business and political activity, plus it's surrounded by major highways and a diverse industry base — feeds into that.
A slow surge in hotel construction could be occurring. Maybe it's already here.