The hotel industry is ripe for recovery, and many banks and lending institutions seem eager to write loans on hospitality projects that were shunned two years ago, according to a group of hotel lenders who spoke Tuesday at the Americas Lodging Investment Summit in Los Angeles.
Among the reasons for their enthusiasm is the continued low-interest-rate environment, the sustained appetite among institutions and lenders in real estate as an asset class, and a widespread belief that the hotel market has bottomed out and is poised for a strong rebound.
The past year was a "unique time, when we had the sun, the stars and the moon all aligned" for hotel lending, says D. Michael Van Konynenburg, president and CEO of Secured Capital Corp. Treasuries and LIBOR rates hit 40-year lows in May, and lenders were "steering capital away from corporate loans into real estate, which way outperformed corporate loans." During the same year, "lender perception of the future performance of hotels materially improved," says Van Konynenburg. Bruce Lowrey, vice president of GMAC Mortgage’s hospitality division, adds that "hotels have a bit of a perceived premium over other asset classes."
Hotel owners and investors might be surprised to hear that 2003 was an ideal year for hotel investment, however. U.S. hotels were just barely profitable, and nearly 8% of all hotel loans underwritten by CMBS were delinquent (60 days late or more) compared to delinquencies of just 1.75% in commercial real estate as a whole, according to Van Konynenburg. The potential upside makes up much of the current appeal for the hospitality sector. Hotel values have been hobbled by widespread anxiety among tourists about the safety of air travel. With fears apparently dissipating, hotels stand to benefit. MetLife Real Estate Investments, for example, made few hotel loans in 2001 and 2002, then originated $275 million in loans, or 8% of its lending activity for the year, in the hospitality sector. In the coming year, the lender was hoping to lend $300 million to $500 million to hotels and resorts, according to director and regional manager John Menne.
Part of that perception of potential for "value-added" can be seen in cap rates for hotels, according to GMAC’s Lowrey. While high-quality hotels historically were financed on cap rates of 10.5% to 12%, "in this market a lot of transactions are at sub-9 or sub-8 cap rates," he says. "The idea here is (that investors) are looking for some upside," Lowrey adds.
But determining the value of hotels is difficult, because many hotels may have scrimped on maintenance and renovation during lean times, according to Menne. "The toughest question we have today is trying to peg value, because many of the basic suppositions are so messed up right now," he says. One question is the level of FF&E (i.e. maintenance on furniture, fixture and equipment) that needs to be performed "to return operations to where they were three or four years ago, when the hotel was in better condition."
As for product type, the Bank of Scotland is looking for "four-star and five-star niche product and high-end resorts in key business and leisure locations" in the U.S. market, according to Peter Anscomb, the bank’s head of hotel finance, while in Europe Anscomb says he would also be receptive to mid-market deals for limited-service hotels.
GMAC’s Lowrey, describing himself as "contrarian," says high-end, full-service hotels are over-priced. He prefers "upscale limited service, possibly development."