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While many industry insiders have been crowing about an evaporation of funds earmarked for hotel industry loans, others are saying money is still available. The reality is probably somewhere in between. Less experienced hospitality industry lenders are turning off the spigots while long term players are still finding value in selling capital.
Even so, it seems experts are equally divided, creating a murky outlook for predicting the future. Though it’s safe to say smart deals will continue to acquire financing, beyond that it’s anyone’s guess.
“Some of the worst loans are written in the best times,” said Daniel Quan, a professor of Real Estate at Cornell University. “I have some concern in [current] underwriting standards and a major concern going forward, although presently RevPAR and ADR increases are strong. It doesn’t take much to drive poorly made loans into delinquency.”
According to Jack Corgel, another Cornell University professor there are three things that could send the capital markets into a tailspin: a catastrophic event, a recession or overbuilding.
“Hotels are quite sensitive to economic conditions,” said Corgel. “There is an unprecedented large set of planning projects in the pipeline. I am still very optimistic because barriers of entry are high.”
Corgel said that basic hotel economics have taught industry pros to manage risk, but hedge funds are teaching us the opposite by taking long and short positions. “The hotel industry has not had the tools to hedge risk effectively,” Corgell added.
“Most deals [done in the past few years] wouldn’t happen right now,” said Joel Ross, principal of Citadel Realty Advisors. “I believe it is going to get worse, not better. Next year the hotel business will be down, not up and this is a real issue for people who paid five to seven times cap and very high levels of high octane financing, some upwards of 90 percent. They are going to get destroyed because properties will be worth less.”
Alan Kanders, SV Global Commercial Real Estate Group, Lehman Brothers said the capital markets have been seeing a “different dynamic” since August than the previous several years. “We have seen widening credit spreads in last few weeks and every week it gets worse. In the hotel market we have seen opportunities come to the market that can’t be met,” said Kanders.
Kanders believes that during the first quarter of 2008 the market will potentially open up again with new allocations from pension funds and insurance companies that will inject more liquidity. Something that’s not currently happening.
Charles Henry, President Hotel Capital Advisors said the hotel industry finds itself in this financial state every decade. “The hotel industry is starved for capital every eight of 10 years and then for two years everybody wants to be a hotel investor. We are the end of the two years now,” said Henry. “Real estate investors are starting to want to get out.
This is not a smooth market, banks will either lend or not lend on hotels and the availability of capital is more important than cost,” said Henry.
“There are a lot of creative people in this industry. They are going to find a way and someone to give them money to chase their dream,” said Corgel.
Kanders believes one segment that will continue to remain strong is the second homes market, which is a good sign for hotels being built in high demand locations that feature residences. “People enjoy going to a location where everything is done for them and we continue to see that as a strong market in the future. It has been a supporter of getting projects done in the luxury market,” said Kanders.
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