REPORT FROM THE U.S.—The hotel credit environment is expected to remain stable during 2014, according to a survey of lenders
from RobertDouglas, Hotel News Now, and STR
, the parent company of HNN.
Nearly half (48%) expect their overall lending volume to remain constant when compared to the trailing 12 months, while 35% said they either plan to increase significantly (6%) or moderately (29%) their lending volume. The fourth quarter 2013 survey comprised more than 50 lenders representing more than 75% of all hotel debt with loan balances in excess of $10 million originated in the United States in 2013.
“It feels good out there in the market,” said Robert Stiles, a principal and managing director at RobertDouglas.
Lenders also are feeling comfortable about the overall economic and lending cycle, according to the survey. Nearly four out of five lenders (77%) said property values are likely to increase slightly during the next 12 months with another 15% indicating that values will grow significantly.
And those surveyed said there is still runway left in the current hotel cycle, with 46% saying growth in hotel asset valuations will not peak for another two to three years. Yet, despite all the good feelings, lenders appear to be taking a more restrained approach to providing debt.
At this point in past cycles, Stiles said, lenders were willing to focus on forecast pro forma performance, but not this time around.
“Lenders are still really disciplined in this cycle as opposed to past cycles,” he said.
Steve Hennis, a director at STR Analytics, a sister company of HNN, said there could be some concern in the market over where interest rates are heading. “There’s a big difference in getting a 4% or 5% loan.”
Indeed, a majority of the lenders surveyed responded that they believe interest rates will rise during the next 12 months. More than half (57%) see a moderate increase from current levels, while 11% forecast a significant increase. About a quarter (26%) expect rates to remain relatively constant, and 6% believe there will be a moderate decrease in rates.
“Generally right now, we are in a sweet spot and we don’t know how long it’s going to last,” Stephen O’Connor, a principal and managing director at RobertDouglas, said of the interest rate environment.
One area where there is at least a little more appetite for debt is in the construction financing market. Stiles said lenders today are much more interested in talking about possible construction deals than previously, when construction lenders were difficult to find.
Of the construction lenders surveyed, the average loan-to-value sought was 67.5%, which is a stark contrast to where LTVs were a couple years ago, Hennis said, when LTVs were closer to the 50% range.
The markets that are getting the greatest interest, according to the survey, are those most familiar to lenders, namely, urban in-fill locations.
“We’re certainly seeing that if you can get construction financing, it’s not terrible,” Hennis said of the loans being made.
He said he is not surprised construction loans are popping up more frequently on lenders’ radar. “It’s the next growth phase.”