HENDERSONVILLE, TENNESSEE, and NEW YORK - Hotel lenders are more cautious in their short-term outlook and believe that asset valuations are at or near peak, according to the sixth annual Hotel Lender Survey.
The survey, conducted by STR, Hotel News Now and RobertDouglas, includes responses from senior balance-sheet lenders, CMBS lenders and providers of subordinate debt financing. Together, the 66 respondents represent the source of the majority of all hotel debt originated in the U.S. in 2018, with loan balances in excess of US$10 million.
“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 Stephen O’Connor, principal and managing director for RobertDouglas.“However, liquidity remains robust to finance new acquisitions, and overall originations are generally expected to remain steady. But clouds are forming on the horizon as more than half of the respondents indicated that financing spreads would widen out in the next year with only a small minority indicating that any further tightening of spreads was anticipated. 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.”
“Last year, we surveyed lenders right after tax cuts passed, and we saw a lot more optimism for 2018 than previous years,” said Joseph Rael, STR’s senior director of Consulting & Analytics. “This year we’ve seen somewhat of a reversal, with a more cautious outlook in general. Most telling was the 33% of lenders that believe hotel values will decrease in 2019. That’s up from only 9% of lenders last year. The U.S. economy is again the largest concern for hotel lenders, but this year, 40% of lenders said this was their chief concern—the most we’ve seen in the six years of the survey. Also, 24% of respondents think that hotel lending volume will decrease this year compared to only 11% last year.”
Overall, the 2018 edition of the Lender Survey reflects stable credit risk spreads with most believing that asset valuations have already peaked or will do so within the next year - all in an environment with fewer expectations of further near-term interest rate increases and more believing interest rates will remain relatively constant.
Key findings from the survey include:
- 52% of lenders believe hotel values to be flat, compared with 61% last year.
- Despite less optimism in hotel values, more than 70% of the surveyed lenders expect the overall hotel lending volume over the next 12 months to remain consistent with 2018 levels. More than two-thirds of lenders expect moderately wider credit spreads in 2018.
- In the previous four years, over half of the surveyed lenders responded that the location and quality of the real estate is the single most important “gating” criteria for financing requests. However, this year most respondents said that cash-flow metrics were most important.
- For the fifth year in a row, survey respondents cited the potential for a U.S. economic slowdown and/or faltering general macroeconomic growth as the most feared threat to a their hotel loan portfolio. The numbers of lenders feeling this way has increased.
- Lenders’ second-most cited fear changed for the first time in five years. Lenders are less worried about increases in competitive supply and now more concerned with refinancing risk due to higher exit cap rates and/or higher future borrowing costs.
- By a wide margin, urban areas continue to be viewed as the least risky to provide financing for hotels.
- Independent and Luxury products are considered to carry the most financing risk.
- Senior lenders require, on average, a minimum debt yield of 9.7% on underwritten cash flow for an existing hotel. That average minimum is up from 9.1% last year.
- Similar to last year, 10% of all lenders surveyed will consider non-recourse construction financing, while 90% of respondents do not provide construction financing.
