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Hotel financing picture reveals optimism
March 13 2012

Growth in key operating metrics and hotel revenue bodes well for hospitality financing.

Highlights
  • Historical trends of RevPAR show that when supply is below historical average, there is a growth in RevPAR.
  • Equity requirements for loans range from 25% to 30%.
  • The Small Business Administration has become very active in hotel financing.
By Bob Coleman, Coleman Report

There is a tremendous amount of optimism in the hotel industry in 2012, a far cry from the scary numbers and grim predictions at the beginning of 2011.

It is a very cyclical business; in March 2010, we saw the first increase over the year before in terms of occupancy, average daily rates, and revenue per available room. Since then, there have been 20 consecutive months where there has been RevPAR growth over the same month the previous year.

That is a great indicator that occupancy has stabilized, demand is coming back, and the threat of overbuilding the new supply coming into the industry is slight.

 

Bob Coleman

In 2008 and 2009, companies’ share prices were punished as a result of the decline in revenues. Jump to today, and for the past three quarters these same companies have not only hit their forecasts, but overachieved. This is what keeps giving the analysts higher outlooks to the future, and bodes well for confidence in the industry.

 

You can further analyze this confidence by looking at some of the key industry indexes. If you look at real gross domestic product versus room-night demand, they really mirror each other. So, with a 5% increase in 2011 from 2010, there could be significant GDP growth going forward.

Hand-in-hand with market demand is market supply, which is judged by new hotels entering the market. It usually averages around 2.1%, but the forecast for the next three to four years anticipate new hotels only accounting for 0.6% of the market. There has never been a time period forecast this long where market supply was substantially below historical national average.

Historical trends of RevPAR show that when supply is below historical average, there is a growth in RevPAR. Lack of new supply and increase in demand in all segments is actually a positive, because it means RevPAR will be on the rise.

When we look at hospitality financing over the next five years, based on historical averages it could be the best time to own hotels. We’re seeing equity requirements to do these loans on average between 25% and 30%. The lending rate is prime plus anywhere from 2% to 2.75%.

The Small Business Administration has become very active in hospitality financing, and some community banks and credit unions are using almost exclusively the SBA in these types of transactions.

Financing in 2011 was substantially more robust in the hospitality industry. There was a higher volume of it compared to historical performance, higher RevPAR growth that continued the trend started in March 2010, and RevPAR growth is expected to grow through 2015.

Why is that?

Because new supply and new construction are virtually non-existent; it will not reach historical averages until at least 2015. Hospitality SBA loans have a comparable if not lower default rate amongst other disciplines within SBA pools.

It has been universally accepted that the recovery of the hotel industry began in the first quarter of 2010. The last cycle was caused by demand disruption, not by overbuilding, which is very important. Even though there was a lot of product delivered, it was demand disruption in 2009 and 2010 that sent the industry into a tail spin.

As a result, though overbuilding not being a threat helps, an opportunity has been created for the next cycle to experience stronger RevPAR growth than any previous cycle, which is a function of the lending environment today.

Bob Coleman is the Author of "Money Money Everywhere And Not a Drop For Main Street." Coleman is the Editor of the Coleman Report, a trade newsletter for small business bankers. He is the nationally recognized expert on small business banking. He has appeared on Fox Business News and CNN and has been quoted by most major financial media outlets including the Wall Street Journal, New York Times and Bloomberg. He has spoken at numerous small business banking events across the United States, including international engagements. Coleman has a B.A. in Medieval History from the University of Southern California and a M.B.A. in Real Estate Finance from the University of Southern California.

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