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Financiers of U.S. Hotels Expect Values to Peak in 2016

According to the year-end release of the 2015 Hotel Lender Survey, a shift in lender expectations suggests that financiers of U.S. hotels expect the current period of growth in hotel asset values to peak within the next year. The third annual survey, conducted by STR, Inc., Hotel News Now and RobertDouglas, includes responses from more than 40 senior balance sheet lenders, CMBS lenders and providers of subordinate debt financing. Together, the participating lenders represent the source of a majority of all hotel debt with loan balances in excess of $10 million that was originated in the U.S. in 2015. Compared with 15% in 2014, 45% of total respondents indicated that the aforementioned peak will occur within the next year. However, there is as much or more debt financing capacity available to hotel owners as not one respondent anticipated decreased hotel lending volumes during the next 12 months. Overall, the survey suggested a cautious outlook of stable asset values, increasing liquidity for hotel finance and a potential spreading of widening credit risk. When asked about the single most important "gating" issue in considering a deal, 46% of the survey's respondents indicated the location and quality of the real estate as the top metric. Cash flow metrics such as debt yield or DSCR were indicated in 40% of responses, followed by the sponsor's experience and track record (9%), the sponsor's liquidity and strength of balance sheet (3%), and the proposed brand and management of the property (3%). "Liquidity of debt financing in the hotel sector remains robust, which is good news for borrowers," said Stephen O'Connor, a principal of RobertDouglas. "However, the 2015 STR debt survey illustrates how lender sentiment has shifted to a more defensive, late-cycle mentality that is skeptical of further growth in asset values absent a compelling value-added business plan." "It's very apparent that lenders anticipate growth to slow this year, with 45% of lenders expecting asset valuations to peak within the next year and 60% expecting hotel values to be flat in 2016," said Steve Hennis, director of STR Analytics. Survey responses indicate that lenders see the Upper Upscale segment as having the least amount of financing risk. Other key findings from the survey include:

  • Urban areas continue to be viewed as the least risky to provide financing for hotels.

  • Independent, Luxury and Economy hotels are now considered to carry the most risk.

  • A U.S. economic slowdown and/or a faltering economic recovery is still seen as the biggest potential threat to existing hotel loan portfolios.

  • 70% of the respondents expect their overall hotel lending volume to remain constant with the trailing 12 months.

  • Senior lenders require, on average, a minimum debt yield of 10.2% on underwritten cash flow for an existing hotel.

  • 60% of lenders expect hotel property values to remain flat over the next 12 months.

  • Among property classes, Economy receives the least amount of interest from lenders who provide construction financing.

  • More than 80% of self-identified active construction lenders will consider projects that are Independent.

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