REPORT FROM THE U.S.—The value of a property is often a major factor lenders take into consideration when making decisions regarding financing. The HVS “2012 United States Hotel Valuation Index” predicts that hotel value growth will persist through 2016, surpassing 2006 values by next year, meaning good news is on the way for hoteliers seeking loans.
“During the downturn, lenders were very, very fearful,” said Chris Allman, VP of finance at Thayer Lodging Group.
What made matters complicated was how difficult it was to determine hotel values during that time, Allman said. “The value indexes were based on such few trades, so there was no clear picture as to what hotel values were really like.”
But the recovery is starting to change that.
Lenders’ anticipation that hotel values will continue to improve on a national level has fueled much more debt availability and has driven down interest rates to all-time lows, according to Greg Hartmann, executive VP and national director of valuations for Jones Lang LaSalle Hotels.
Thayer Lodging Group
A bullish growth projection for values during the next several years is great news, said Jake Clopton, president at Clopton Capital, a Chicago-based commercial financing services firm. “It may convince some people to give a little more leverage.”
For deals in the $7-million to $20-million range, Clopton is seeing a lot of leverage at 55% of the hotel’s value.
For properties in tertiary markets in particular that are in the $7-million to $15-million range, the commercial mortgage-backed securities market is all there is for them, Clopton said.
“There’s been a reemergence of CMBS lending,” Thayer’s Allman said. “CMBS lending is much less selective about the kinds of deals … (as opposed to) banks and loan companies, so where you are seeing aggressive lending is in the CMBS (space).”
Provided there is not a major financial crisis in Europe, CMBS lending will increase in 2013, Allman said. However, borrowers need to keep in mind that CMBS loans are not for everyone; they should not jump into that market without fully understanding the terms.
Individual market performance
Honing in on key markets in the country, the HVS report found that Las Vegas is projected to capture the largest value growth in 2012, increasing 57%. Tucson, Arizona, is expected to see the greatest declines in 2012, down 23%, followed by Washington, D.C. with an 8% decline in hotel values on a per-key transactional basis.
However, through 2016, Tucson is projected to see the greatest increase in hotel value, growing 170%.
Skyrocketing hotel values in some markets are the result of broader economic recovery, Allman said. In Las Vegas, for example, where several major assets went bankrupt during the downturn, values are increasing as demand returns to market.
In markets where values are projected to decrease in the short term, lenders are likely to tighten up their purse strings.
The Tucson market is one such example, said Clopton, whose Chicago-based company has conducted business in the past. Save for some financing from local lenders that know the city well and will account for value increases projected in the long term, the market probably will not see a lot of activity in the next year.
Jones Lang LaSalle Hotels
Not all markets are created equal, however. Although Washington, D.C. is expected to experience decreasing hotel values, lenders are more likely to view it favorably because of its historically strong performance, Hartmann said.
“This is supported by two large transactions Jones Lang LaSalle conducted on the 335-room Hotel Palomar and the 888-room Grand Hyatt in 2012, despite the construction of the 1,175-room Marriott Marquis,” he said.
Hartmann said Jones Lang LaSalle Hotels’ research indicates that most markets improve significantly after the opening of a new convention hotel, and the company expects Washington, D.C., will not be an exception after the opening of the Marriott Marquis.
Lenders are going out on a limb for the right borrowers in the right cities, Allman said.
“You’re seeing a huge disparity between the have and the have-nots.”
For example, in New York, there is a long line of borrowers that are doing well, and it is a similar case in San Francisco, he said.
However, in markets such as Louisville, Kentucky, it’s a bit of a different story. “People are a little more afraid of the secondary markets,” he said.
Although borrowers in some markets will continue to struggle with financing, things are generally looking better for the country as a whole, Allman said.
“We’re cautiously optimistic.”