RICHMOND TIMES-DISPATCH
by Andrew Little, Special Correspondent
Canadian rapper Drake could have been referring to the hotel industry over the past eight years in his song “Started from the bottom, now we’re here.”More than 19 percent of the loans secured by hotels in June 2010 were delinquent or had been foreclosed upon and were still being held by special servicers. Hotels were the worst-performing loans by far back then.The second-worst performer were loans secured by multifamily properties with 12.93 percent delinquent.Today, it is a different story. Hotels are performing quite a bit better with only 2.10 percent of the $80.2 billion in hotel commercial mortgage-backed security loans delinquent, according to information from real estate data provider Trepp LLC.
No hotel loans are delinquent in the Richmond region, including total loan balances that exceed $340 million spread out among 39 loans.Hotel performance has improved so much that the only major property type that performs better is multifamily with a measly 0.35 percent of the $256.5 billion in outstanding loans considered troubled. Loans secured by office, industrial and retail loans all perform worse than hotels.So why are hotels performing so well? There are two primary reasons: a growing economy and constrained supply.The economy recently entered its 35th straight quarter of GDP growth and as the economy goes, so goes hotel performance.The reason, of course, is the rent roll for each hotel lasts one night — shorter than any other property type. When the economy is growing, so is demand.Supply is the other part of the equation.
Since hotels were performing so poorly in 2010, lenders decided it was not a good idea to lend to hotel developers. So only the best operators were able to get new supply built and, generally, that was with significant equity and reasonable leverage.In the Richmond region in the past five years, many new hotels have been developed by Apple Hospitality REIT, a Richmond-based publicly traded real estate investment trust with a market capitalization in excess of $4.1 billion, and Shamin Hotels, the Chesterfield County-based company that is the region’s largest hotel operator with more than 50 hotels, most locally.While more supply is coming online, it is measured and somewhat controlled by the established owner/operators.
The dynamic should help limit outrageous changes in the market’s supply. Since every night presents a new opportunity to change rents, strong demand combined with limited supply can keep hotel revenue growing.What is happening in the region is also true across the country. While some markets are overbuilt, most markets are still in balance for hotels, and that’s made hotel loans attractive again.A recent study by Trepp showed that commercial mortgage-backed security lenders are willing to write more hotel loans than in prior years.In 2017, nearly $25 billion in hotel loans were originated and, so far this year, $10 billion in loans have been issued. Compare that with 2015, when only $11.5 billion in loans were issued for that entire year.
Overall mortgage rates remained fairly stable over the last month and are currently in the 4 to 4.25 percent range for 5- and 10-year loans offered by life insurance companies, according to the John B. Levy National Mortgage Survey. Unfortunately for hotel operators, life insurance company lenders have a limited appetite for hotel loans, which means most get financed through conduits or banks.Conduit pricing is more expensive for full loans and ranges from 4.85 to 5.15 percent for 10-year loans depending on leverage.
John B. Levy & Co. partner and investment banker Andrew Little can be reached at alittle@jblevyco.com.
