Hotel Lenders See Peak But Stay Positive

Hotel lenders think asset values are approaching a peak, but their short-term outlooks are less cautious today than one year ago, the STR/RobertDouglas Hotel Lender Survey reported.

For the fourth consecutive year, lenders cited the potential for a U.S. economic slowdown or faltering general macroeconomic growth as the most feared threat to their hotel loan portfolio, the report said.

Hotel research firm STR, Hendersonville, Tenn. and real estate investment banking firm RobertDouglas, New York, surveyed senior balance-sheet lenders, commercial mortgage-backed securities lenders and subordinate debt financing providers about their lending plans.

“Most lenders still believe asset values are near the peak, but more are optimistic about the next 12 months than they were at the beginning of 2017,” said STR Financial Performance Director Joseph Rael.

Almost 70 percent of lenders expect overall hotel lending volume will remain consistent with the previous 12 months, the report said.

Overall, the 2017 Hotel Lender Survey found “stable” credit risk spreads balanced by a cautious outlook of peaking asset values and expectations for further interest-rate increases. More than two-thirds of lenders said they expect moderately wider credit spreads in 2018.

More than 60 percent of lenders surveyed said they expect hotel values will remain flat during the next 12 months. None predicted hotel values will increase significantly and 9 percent of respondents anticipate values will decrease slightly during that period.

In a significant reversal from one year ago, less than 10 percent of lenders will consider originating any kind of construction financing. But among those that said they will finance construction, most indicated they would provide non-recourse construction loans, another change from last year when 20 percent said they needed full recourse guarantees. 

More than half the lenders surveyed cited location and quality of real estate as the two most important “gating” criteria for financing requests. Urban areas are viewed as the safest places to provide hotel financing. Among hotel quality segments, economy hotels received the least interest from lenders. Economy, independent and luxury hotels are considered the riskiest to finance.

The report noted senior lenders require an average minimum debt yield of 9.1 percent on underwritten cash flow for an existing hotel, down from 10 percent last year.