Hotel Loan Performance Wows As Sector Delinquencies Hit Post-Crisis Low
The hospitality and lodging sector is having a stellar year: Investment activity is on the rebound, demand has ballooned and access to capital is enabling borrowers to refinance and pay off debt at a faster clip than other property sectors.
Hotel commercial mortgage-backed securities experienced the lowest delinquency rate of the five core CRE sectors in July, bumping multifamily from the top spot for the first time since July 2012 with a 2.25% delinquency rate, Trepp reports.
Though apartments reclaimed their lead in August, with a 2.07% delinquency rate, hospitality trailed closely behind with a rate of 2.22%, and it continues to be one of the strongest performing asset classes of the year.
“Part of the story with hotels is that it has been a very liquid market and it's been able to take advantage of cheap refinance terms and greater availability of money,” Trepp Senior Managing Director of Applied Data, Research and Pricing Manus Clancy told Bisnow.
Hotel borrowers have had less difficulty paying off debt this cycle than other property types, largely due to lenders' more stringent underwriting and loan origination practices post-crisis.
"In the hotel sector for the last 10 years post-crisis, lenders have been a bit more discriminating than they were for office and multifamily properties,” Clancy said. “That has led to more conservative underwriting, which has helped limit the number of defaults you have seen in post-crisis loans.”
Hotels are volatile assets, with leases as short as a day versus office and multifamily's longer-term commitments.
“So hotels having the lowest default rate is a signal that there is strong investor quality,” Younge said. Investors in the space have to do more due diligence to assess operator and asset strength, which he sees as beneficial to the health of the loans. “I don’t know how long-lived it will be, but I can say it is a wake-up call to investors and lenders of multifamily [that] we could see some tightening in the lending requirements.”
The sector continues to hit record-breaking milestones this year. In June, hotel data and benchmarking provider STR reported the hotel industry experienced its 100th consecutive month of revenue per available room growth, the longest streak of uninterrupted revenue growth in the industry’s history.
Both transaction volume and hotel pricing were also up in the first half of the year, by 11.3% and 12.2%, respectively, with transactions in New York and Florida driving deal volume much of the year, STR reports.
“There seems to be more optimism around the industry right now, and that of course pushes more transactions activity,” STR Director of Consulting & Analytics Jospeh Real said in a statement. “There are also several high-priced assets likely to be sold in the next few months, which will significantly boost average pricing for the remainder of the year."
The passing of the new tax law has also been a perceived tailwind for the sector, according to the hospitality midyear report by commercial brokerage and services firm Marcus & Millichap. Provisions that allow hoteliers to expense and deduct the cost of furniture, roofs, security, heating and ventilation up to $2.5M (though only $1M allocated toward furnishings can be deducted) is expected to continue driving investment in value-add lodging properties throughout the remainder of the year.
A Few Headwinds
Local economies struck hard by the energy crisis of 2015 and 2016 have made it particularly difficult for hoteliers and borrowers in those markets to pay off debt in a timely fashion.
Crude oil production had peaked around $115/barrel in 2014 and those areas most dependent on the energy sector — such as select markets in Texas, New Mexico and Louisiana — were reaping the benefits. Small towns in oil patches, such as along South Texas' Eagle Ford Shale, rode an astronomical surge in demand for temporary housing for oilfield workers. Pricing was high and development spiked. But massive global oil output coupled with a lack of demand triggered a huge price correction that sent crude prices to lows of $26/barrel in early 2016.
“It’s unique in places like Dakota and West Texas in that all you had is hotels and housing. People weren’t putting up offices, just putting up structures to support oil workers,” Clancy said. “[That’s the] only thing that could default.”
“The narrative compared to a year ago is far more positive now. [It] is a reflection of the type of loan agreements penciled in … [that have been] overly cautious, and because of that the default rates have been low,” Younge said. “I don’t think the lending parameters will get more favorable because we are seeing increases in Fed rates and still discussions that we could be at the peak — there’s increased optimism but I do think that there’s not going to be a relaxing in the lending parameters for hotels. In fact, it might get stricter given the volatility in the world markets."