Burgeoning hotel supply in NYC could increase the risk for $3.68B in fixed-rate CMBS loans, according to a new report by Morningstar Credit Ratings.

Data from hotel market analysts shows supply of hotel rooms in NYC has skyrocketed by 26.3% since 2009, and while the supply boom keeps going, demand growth is slowing somewhat—pushing down occupancy rates.

“In NYC you get a disproportionate share of demand from overseas,” Morningstar Credit Ratings VP of CMBS Brian Snow tells Bisnow. “That has slowed—it’s still growing, but its not growing as robustly as it has been. Meanwhile, supply growth is accelerating.”

The deceleration in demand growth comes as the dollar rises in comparison to currency in countries that provide a lot of tourism to the US, such as Canada and Brazil—lowering the buying power for their citizens.

On the supply side, EB-5 funding, famous for its financing of the luxury condo boom, has also helped spur NYC’s boom in hotels. Case in point, Silverstein's 82-story Four Seasons hotel in Downtown NYC easily broke its EB-5 fundraising goal of $250M.

Brian tells us that, while we’ve seen supply surge across the country, Manhattan is a unique case due to the lack of available land to build on—so to see supply increase by 15% over the next couple of years (as Morningstar expects) is significant.

“It’s mostly high-rise construction—for example, the world’s tallest Holiday Inn, a fifty-story tower, went up in 2014,” he says.

The danger for these CMBS loans come as a confluence of factors have dragged down the CMBS market—Basel initiatives have cut liquidity, along with Dodd-Frank regulations set to come into effect (unless this bill passes) this December.

Topping off those headwinds, the CMBS maturities wall is looming, as the massive amount of CMBS loans made in ’06 and ’07 are coming due—something that will affect these hotel loans as well.

Brian adds that CMBS connected to hotels are particularly vulnerable to market slowdowns—unlike other property types with a stable income, hotel revenues vary day-by-day. 

“With hotels it’s much more volatile, which is why we’re focused on this,” Brian tells us. “You don’t know next year, or even tomorrow, what the revenues are going to be.”