The hotel debt market is in bad shape, and it will be a while before it gets better. Want more bad news? The CMBS market is completely gone as a lending vehicle for hotels, at least in the near term. In addition, cap rates are rising, and hotel values are sinking. These were some of the grim assessments offered by a panel of lenders and brokers at last week's Hospitality Asset Managers Association meeting in Austin, Texas.

"It's a moment of maximum fear in the lending community," said Rob Stiles, executive vice president and principal of Cushman & Wakefield Sonnenblick Goldman. "The markets are de-leveraging across all sectors and business types."

Debt money is still available, said the panel, but at terms that will probably inhibit many deals from reaching consummation. As Melissa Moore, underwriting team leader at GE Real Estate, noted, "Loan spreads have gone up and LTVs (loan-to-value ratios) have gone down: from as high as 80% to 85% a few years ago to 60% to 65% today."

Worse yet, said the experts, the market is currently so fluid that some lenders are invoking such flexibility in loan terms that borrowers may not learn the rate of the loan or the required recourse until they reach the closing table.

According to Stiles, the few deals getting done involve highly motivated sellers and assumable debt, but only if it is fixed-rate, long-term debt with more than just a few years left on the term. "Cap rates are rising for several reasons," he said. "Hotels are generating lower cash flows due to the slowing fundamentals of the business and the cost of capital continues to increase."

Peter Dannemiller, executive vice president of Hodges Ward Elliott, downplayed the notion that sovereign wealth funds will soon become more active in the U.S. hotel market. "These funds aren't buying many hotels right now, either in the U.S. or in their own regions," he said. "If they do re-enter the market, it will probably only be to invest in the hotels they stay in — luxury properties in the markets they visit — gateway cities. This means they won't be investing in Hilton Garden Inns and Courtyards."

Stiles offered the only silver lining: The depressed credit markets will mean a slowdown in the construction pipeline for luxury and high-end hotels. That will also be true, he said, for those lodging developments that also include for-sale products, such as fractionals or whole-ownership residential.

The panelists were fairly optimistic the credit markets will return to some normalcy as early as next year or 2010, but with a number of key caveats.

"If defaults among hotel loans remain low and the housing market stabilizes, liquidity will return to the market," said Moore. "Money will be more expensive and underwriting will be tighter. And if hotel loan defaults increase, the time horizon will be longer."

Until then, the credit markets will remain very tight. As one panelist said, "We closed a deal last week for the refinancing of an existing property. After the close, someone in our office sent a message to the borrower: 'Congratulations on closing the last hotel loan of 2008.'"