REPORT FROM THE U.S.—The wild and free lending days of early 2007 are coming back to bite the hotel industry.
The May delinquency rate for U.S. hotel commercial mortgage-backed securities loans that were 30 or more days delinquent surged by 172 basis points and is now higher than 12%, according to data provided by research company Trepp LLC. The overall CMBS delinquency rate reached an all-time high of 10.04% in May, an increase of 24 basis points when compared to April of this year.
In looking at the hotel CMBS data, Manus Clancy, a senior managing director at Trepp, said the early days of 2007 saw some of the loosest CMBS underwriting in recent history. Many of these loans were five-year, floating-rate loans that are coming due in 2012.
There could be other reasons for the increase, too, said Russell C. Savrann of the law firm Sandman Savrann PLLC, where he specializes in the hospitality industry.
First, there is little rescue capital available in the market to breathe life back into these dying CMBS loans, Savrann said. If there’s a loan coming due but no rescue equity available, there’s no impetus for the CMBS borrower to pay back the loan.
Also, he said a CMBS loan has to be in default and handed off to a special servicer before it can be worked out, so it’s possible some people might be strategically defaulting to initiate a workout negotiation.
Tino Korologos, a managing director with Deloitte, said Europe’s problems with its own credit markets is casting a shadow over the United States.
Tino Korologos, Deloitte
“There’s all this uncertainty with Greece and Spain now,” he said. “There’s a lot of uncertainty as to how it might affect liquidity going forward.”
Executive VP Rich Lillis of Colliers International Hotels said the decline in hotel values isn’t helping when borrowers face maturity default.
“The problem in many markets is that the values have not come back up to 2007 levels,” he said. “(Property-improvement-plan) issues exacerbate the problem. Even if you have willing capital, if you have a value problem, you’ll have a lot of these guys just shrug their shoulders and give the keys back.”
Korologos said the sharp increase in May might amount to nothing more than a “near-term pop” in the delinquency rate. He noted the hotel CMBS delinquency rate is lower than it was a year ago. According to Trepp, the delinquency rate for hotel CMBS in May was 12.27%, down from 15.37% a year ago.
“Barring any other surprise blow ups, we’ll probably see a drop off again,” he said.
Overall, CMBS issuance a year ago was in the mid $30 billion range, with hotel CMBS comprising approximately 10% of the total, sources have previously said. Issuance for 2012 has been placed in the $40 billion to $45 billion range.
Korologos said much of the 2007 CMBS volume was originated during the first half of the year. Lending institutions at the time were eager to push loans out the door fearing, correctly, that the financial markets were on the brink of turmoil.
“There was a concern the band would stop playing soon,” he said.
Clancy agreed, and predicted the delinquency rate should begin to level off as 2012 progresses and the volume of maturing CMBS “trickles away.”
Lillis said the data he’s seen shows that the volume of CMBS being transferred to special servicing has already begun to slow.
“It seems to me that the hotel loans going into special servicing probably peaked last year or even two years ago,” he said.
Korologos said the hotel CMBS market is likely to see liquidity during 2012, albeit with tighter underwriting. “It will be back to ‘Who’s the sponsor? Where’s the property? And how much leverage are you putting on it?’”