Hotel Lenders Growing More Cautious

Hotel lenders are growing more cautious and believe asset valuations are at or near peak, sector analysts say.

STR, Hotel News Now and RobertDouglas interviewed senior balance sheet lenders, commercial mortgage-backed securities lenders and subordinate debt financing providers. Together, the 66 respondents represented the majority of hotel debt originated last year.

“It would appear that we are at an inflection point in the hotel-asset value cycle as an increasing majority of lenders are indicating that values have peaked,” said RobertDouglas Principal and Managing Director Stephen O’Connor. “However, liquidity remains robust to finance new acquisitions and overall originations are generally expected to remain steady.”

But O’Connor noted some “clouds forming on the horizon” as more than half of respondents predicted financing spreads would widen in the next year. Only a small minority predicted further spread tightening. “That trend, coupled with the continued expectation for moderate interest-rate increases and an increasing focus on cash-flow metrics as the gating issue to a financing request, underpins the feedback from an increasing minority of lenders that refinancing risks and increasing debt service burdens pose significant threats to their loan portfolios,” he said.

STR Senior Director of Consulting and Analytics Joseph Rael said one year ago lenders were optimistic for 2018, largely due to the Dec. 2017 tax cuts. “This year we’ve seen somewhat of a reversal, with a more cautious outlook in general,” he said. Most telling: one-third of lenders said they believe hotel values will decrease this year, up from only 9 percent of lenders last year.

Despite less optimism about hotel values, more than 70 percent of lenders contacted said they expect the overall hotel lending volume over the next 12 months to remain consistent with 2018 levels, the report said.

The U.S. economy is again the largest concern for hotel lenders, Rael said. This year 40 percent of lenders ranked the economy as their chief concern–the highest figure in at least six years.

Senior lenders now require a 9.7 percent minimum debt yield on underwritten cash flow for an existing hotel on average, the report said. That average minimum increased from 9.1 percent last year.

Similar to last year, 10 percent of lenders surveyed will consider non-recourse construction financing, while 90 percent of respondents do not provide hotel construction financing.