Hotel Lenders Confident But Cautious

A shift in lender expectations suggests the current period of hotel asset value growth could peak within the next year, a survey of commercial real estate lenders said.

“Liquidity of debt financing in the hotel sector remains robust, which is good news for borrowers,” said Stephen O’Connor, Principal with RobertDouglas. But he noted lender sentiment shifted to a more defensive, late-cycle mentality since the last survey, “skeptical of further growth in asset values absent a compelling value-added business plan.”

Lodging Econometrics, Portsmouth, N.H., reported that hotel selling prices reached $162,781 per room last year, nearly triple the $57,434 recorded during the cyclical low of 2009.

“It’s very apparent that lenders anticipate growth to slow this year, with 45 percent of lenders expecting asset valuations to peak within the next year and 60 percent expecting hotel values to be flat in 2016,” said Steve Hennis, Director with STR Analytics, Hendersonville, Tenn. More than 40 senior balance sheet lenders, commercial mortgage-backed securities lenders and providers of subordinate debt financing participated in the 2015 Hotel Lender Survey conducted by STR, Hotel News Now and RobertDouglas. The participating lenders represent the source of most hotel debt with loan balances exceeding $10 million originated last year.

Nearly half of respondents indicated the value peak could occur within the next year, compared with 15 percent who predicted that a year ago. Not one respondent anticipated decreased hotel lending volumes during the next 12 months.

Overall, the survey suggested a cautious outlook of stable asset values, increasing liquidity for hotel finance and a potential spreading of widening credit risk.

When asked about the most important facets of a deal, 46 percent of respondents indicated the real estate’s location and quality of as the top metric. Cash flow metrics such as debt yield or debt-service coverage appeared in 40 percent of responses, followed by the sponsor’s experience and track record (9 percent), the sponsor’s liquidity and strength of balance sheet (3 percent) and the proposed brand and management of the property (3 percent).

Lenders see the upper-upscale segment and urban areas as the lowest-risk financings, the survey said. Independent, luxury and economy hotels now carry the most risk, but more than 80 percent of active construction lenders will consider independent projects.

Other findings included:
— A U.S. economic slowdown and/or a faltering economic recovery is still seen as the biggest potential threat to existing hotel loan portfolios.

— More than three-quarters of respondents expect their overall hotel lending volume to remain constant with the trailing 12 months.

— Senior lenders require a minimum debt yield of 10.2 percent on average on underwritten cash flow for an existing hotel.

— 60 percent of lenders expect hotel property values to remain flat over the next 12 months.

— Among property classes, the economy segment receives the least amount of interest from lenders who provide construction financing.