Marcus & Millichap: Hotel Lenders Grow More Conservative

Hotel lenders are tightening leverage and lowering loan amounts as the sector’s performance metrics slip, reported Marcus & Millichap, Calabasas, Calif.

“The new, more conservative lending stance occurs amid a period of continuing liquidity in the debt market and accompanies rising interest rates that are increasing borrowing costs,” the company’s Hospitality Investment report said.

Banks and commercial mortgage-backed securities lenders typically underwrite deals at up to 65 percent for up to 10 years, the report said. “Moderating rates of growth in occupancy and revenue per available room, though, require more conservative underwriting and a renewed focus on top brands and markets that have multiple and diverse room demand drivers.”

Marcus & Millichap noted that construction lending may also be approaching a crossroads “as higher borrowing costs and lower leverage prevent some projects from penciling out and new property performance results accumulate.”

The 10-year U.S. Treasury rate rose significantly following the November election and in March the Fed raised interest rates for the second time in three months. This affected hotel asset pricing and in some cases delayed transaction closings, Marcus & Millichap said, noting that the gap between buyers’ expectations and sellers’ expectations will likely continue.

Marcus & Millichap said that higher long-term interest rates will “drive greater urgency” among owners needing to refinance maturing loans. “Expectations of additional action by the Federal Reserve this year will also lead to higher rates on short-term loans, a common financing option for properties in transition,” the report said. “Interest rates on bridge loans have increased and lenders have also decreased leverage, introducing new considerations for borrowers that are likely to arise often this year.”

Banks dominated hotel lending last year as commercial mortgage-backed securities loan originations dropped for all property sectors. “Some [existing CMBS] borrowers may not be able to refinance through CMBS, but high liquidity and competition among lenders will potentially provide new alternative financing solutions, including subordinated or mezzanine debt.”

Meanwhile, hotel firm stocks outperformed broader indexes including the S&P 500 and the recently launched MSCI Real Estate Investment Trust index in March “as investors rotated into the sector, given still-attractive relative valuations versus other real-estate sectors,” said Robert W. Baird & Co. Vice President and Senior Hotel Research Analyst Michael Bellisario.

The Baird/STR Hotel Stock Index rose 3.3 percent during March compared to zero growth for the S&P and a 3 percent decline for REITs.

STR President and CEO Amanda Hite noted that she does not expect slower average daily hotel room rate growth to change very much, “and we continue to monitor the supply pipeline closely as growth in new rooms accelerates,” she said.