In a survey including more than 60 lenders, the overall sentiment showed there is both caution and confidence to be had toward the hotel lending environment in 2019.
HENDERSONVILLE, Tennessee—In past years, lenders have expressed the need for some carefulness when it comes to hotel lending, but a recent survey looking ahead to 2019 shows a split between caution and confidence.
The annual Hotel Lending Survey conducted by Hotel News Now, its parent company STR and RobertDouglas, concluded 46% of the respondents said they are “cautious about hotel performance and/or macroeconomic trends” while 48% said they are confident about where the future of hotel performance is headed.
The overall view from survey participants, which included 66 hotel lenders representing the majority of the hotel debt that originated in the U.S. in 2018 and with loan balances in excess of $10 million, is that while most anticipate there won’t be any substantial change in hotel valuations in 2019, “the outlook appears to be less optimistic than a year ago.”
A majority of surveyed lenders believe the asset valuations have already peaked or likely will within the next year. And lenders are “slightly more cautious about the short-term outlook of hotel lending than in 2018.”
HNN asked five surveyed lenders to provide some more color behind their outlook on the lending environment
Tristine Lim, VP, Calmwater Capital, said in an email interview his company is concerned about oversupply in certain markets and will be more cautious and selective in hotel lending in 2019. Having an experienced sponsorship/operator is key, he added, and Calmwater Capital likes markets where there are “multiple, sustainable demand generators.”
“As a nationwide bridge lender, we will continue to look for transitional opportunities across the country that include quality assets, compelling business plans and sponsors/operators with a solid track record,” Lim said.
For Jonathan Kohan, managing director and first VP of The Bancorp, said via email he thinks lending will be stable in 2019, and his company “will keep our volume the same and pursue optimistic trades in the sector based upon individual metrics and markets.”
Lenders and borrowers have maintained discipline in underwriting in terms of yields and relative basis, “which has kind of allowed a healthy environment for hospitality lending to continue,” said Michael Corridan, director of CMBS and real estate at Citigroup, in a phone interview.
He added liquidity in the market is strong with lenders around the globe “from nearly every sector all actively reviewing and competing for opportunities.” He said doesn’t see a need for much caution and hospitality as an asset class “looks favorable rather than some others in my view.”
Dana Tsakanikas, EVP of Stonehill Strategic Capital, said he sees several potential threats. One of the top concerns is the rising cost of labor, and the availability of labor in general, combined with rising real estate taxes and other expenses, “during a period of slower revenue per available room growth.”
He added that as the Federal Reserve continues to “hike interest rates too fast,” and if cap rates remain compressed, it could create a “potential flattening of net operating income and the rising interest rates can lead to higher cap rates—with the result being potentially lower values or transactional stagnation.”
“And of course, there’s always the black swan event risk that none of us can really control,” he said. “It all comes down to buying right, or financing at the right basis, and having the right team—owner, hotel manager, asset manager—that can create value and control expenses,” just as well as having debt and equity partners who understand the hotel business.
Looking ahead at a long-term outlier risk, Tsakanikas said Google, Amazon and Facebook’s ability to influence a hotel customer and create experiences outside what the hotel brands are doing “would be a powerful and potentially industry-changing, away from traditional hotel offerings.”
About 70% of surveyed lenders said that “they will originate a constant level of hotel sector financing in the next year.” The survey also notes, though that ”there was a greater decline in lenders who forecast moderate or significant increases in lending in the hotel sector.”
But Lim said 2018 was a good year for Calmwater Capital and they were able to finance some exciting hotel projects, including the Thompson Hotel in Hollywood, California, and Banyan Cay Resort & Golf in West Palm Beach, Florida.
“We expect to increase the overall lending volume across our portfolio in 2019 and anticipate the volume for hotel lending to remain flat or decrease slightly compared to 2018,” he added.
Kohan said he doesn’t foresee any change in lending volume over the next 12 months
Between 2017 and 2018, the survey noted that there has been little shift in the overall sentiments from lenders, as most lenders (41%) still believe asset valuations have already reached its peak. However, of those who think there is still room for an increase in asset values, 24% predict values will peak in 2019 and 27% think the peak will occur at the end of 2020.
But less than 10% think an increase in asset values would extend beyond two years.
Corridan said he echoes former Chair of the Federal Reserve Janet Yellen in that “expansions don’t die of old age.”
“Ask me in a few years, but for now we’re comfortable with current valuation rewards and the risk/rewards they offer,” he said.
The survey noted that a majority of the lender respondents feel there won’t be a substantial change in hotel valuations in 2019; however, the outlook is anticipated to be less optimistic than the previous year.
Matt Brody, senior managing director, Savills Studley, said he is anticipating there will still be a rise, but it will not be “as substantial as the last few years.”
Corridan said he doesn’t expect a dramatic shift in the way equity investors are looking at transactions and he anticipates valuations to remain healthy over the next 12 months.