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Competition And Overbuilding Threaten Hotel Loan Performance In 2018

Hotel loan performance could take a drastic hit this year due to a looming surge of room supply.


Hotels have generally performed well during the economic recovery since the 2008 financial crisis. Even with the rising threat of disruption from competitors like Airbnb and an increasing supply of traditional hotels, strong demand and moderate occupancy rates have kept the sector above water. That said, a new report stresses 101,000 new hotel rooms expected to come online in 2018 may finally take a toll on borrowers' ability to pay off hotel loans.

"It’s a funny dichotomy,” Trepp Managing Director Manus Clancy said. “Your 24/7 cities have done so well in office and multifamily for, really, the whole post-crisis, but that’s come with a fair amount of high-end hotel inventory additions. There’s not enough demand to go around in some of these places.”

The lodging sector accounts for 16% of all U.S. commercial mortgage-backed securities. Though tThese have generally been a success this cycle and hotel CMBS delinquencies are pacing below average, Trepp cautions that overbuilding in select markets can stifle demand, hinder occupancy levels and increase the number of loan delinquencies. 

Nashville, Tennessee, Houston and Savannah, Georgia, are expected to gain the most hotel rooms in 2018. While gateway markets like New York are always attractive locations for new product, Clancy said overbuilding in less desirable roadside markets along highway routes between New York and Florida are posing a threat to loan performance.

Intercontinental Real Estate Corp. Chairman and CEO Peter Palandjian and Intercontinental Real Estate Corp. Director of Marketing and Communications Manon Palandjian at the groundbreaking of Intercontinental Real Estate Corp. and Harbinger Development's dual-brand Hampton Inn/Homewood Suites in Boston's Seaport District

“One of the areas you saw grow in spades is in the upper Midwest in the Shale Belt [North and South Dakota],” Clancy said. “Everyone thought the shale industry was going to go into perpetuity, but, when oil tanked, all this hotel inventory hit the rocks and defaulted very quickly. It can happen at the high end, the low end and even extended-stay product.”

A Hampton Inn & Suites in Yonkers, New York, and a Hampton Inn & Applebee’s in Westampton, New Jersey, were among the largest lodging CMBS loans to become delinquent in February. But not everyone is as concerned with overbuilding.

The average hotel occupancy rate in Boston in 2017 was 82.2%, the highest in the city’s history. Boston is also facing a historic level of new supply on the verge of hitting the market. An estimated 1,100 rooms will arrive in 2018, and there are a total of 7,500 hotel rooms proposed for the region, according to Pinnacle Advisory. But the developer behind a 400-room, dual-brand Hampton Inn/Homewood Suites that broke ground Tuesday in the city’s popular Seaport District is not concerned with more rooms impacting his property.

“Any location in reasonable proximity to the convention center and the burgeoning Seaport District will be a prudent investment in the short term and certainly the long term,” Intercontinental Real Estate Corp. Chairman and CEO Peter Palandjian said. “This limited-service hotel segment is in short supply. Boston needs more.”