Hotel Pipeline Shrinks

Hotel rooms currently under construction fell slightly–0.1 percent year-over-year–to 183,187, reported STR, Hendersonville, Tenn.

“This is the first time there has been a year-over-year decrease in U.S. hotel construction since October 2011,” said STR Senior Vice President for Operations Bobby Bowers. “The construction total also fell 2.8 percent from the previous month, and with the final planning and planning stages not moving up significantly, we can expect to see slowing in pipeline numbers in the coming months.”

New York had the most rooms under contract among the largest markets with 24,858, and also the most rooms in the in-construction phase with 12,702 rooms, STR reported. Other markets with more than 15,000 rooms under contract in October include Dallas with 18,712, Orlando, Fla. with 16,210 and Houston with 15,979.

“In September, average daily rates decreased in the top 25 markets for the first time since the recovery period began,” Bowers said. “New supply continues to pressure occupancy levels and rates in these markets.”

Marcus & Millichap, Calabasas, Calif., said investors have maintained their confidence in the hospitality market because room demand remains healthy.

But the Marcus & Millichap National Hospitality Report noted several “potential headwinds” for the sector, including growing construction pipelines in some major markets that can place downward pressure on occupancy, average daily rates and revenue per available room this year and into 2018.

William Hughes, Senior Vice President with Marcus & Millichap Capital Corp., said hotel sector capital markets remain “highly competitive,” with a broad assortment of fixed-rate products available. “Year-to-date, commercial mortgage-backed securities’ market share has moved from a quarter of the market up to comprising one-third of hotel lending,” he said. “Loan-to-value for CMBS typically is in the low-60 percent range.”

National and regional/local banks are responsible for one-quarter of hotel lending activity this year with smaller loan sizes and loan-to-value ratios averaging from 60 percent to 90 percent-plus for Small Business Administration products, Hughes said.

Interest rate increases this year have increased the cost of capital, Hughes noted. “While commercial real estate fundamentals remain strong, rising costs associated with debt financing will tighten the spread between cap rates and lending benchmarks,” he said. “This environment could weigh on transaction activity as investors evaluate their yield options. Cap rates have remained relatively stable over the last year, but upward movement in Treasury rates has amplified the expectation gap between buyers and sellers.”