Of the 66 major hotel lenders in STR’s sixth annual Hotel Lender Survey, 33 percent said they think U.S. hotel values will go down this year.

THE OPTIMISM OF 2018 among major lenders for hotel developments has dropped significantly in the early days of 2019, according to STR’s sixth annual Hotel Lender Survey. More of the lenders believe hotel values will drop this year as valuations reach or come close to peaking, meaning they will be more cautious in approving new loans.

The survey of 66 lenders, which together hold the majority of U.S. hotel debt from 2018 with loans of more than $10 million, found that 33 percent think hotel values will decrease this year.

“That’s up from only 9 percent of lenders last year,” said Joseph Rael, STR’s senior director of consulting and analytics.  “The U.S. economy is again the largest concern for hotel lenders, but this year, 40 percent of lenders said this was their chief concern—the most we’ve seen in the six years of the survey. Also, 24 percent of respondents think that hotel lending volume will decrease this year compared to only 11 percent last year.”

The survey’s findings indicate that most lenders think hotel values have peaked, said Stephen O’Connor, principal and managing director for the RobertDouglas marketing firm that helped conduct the survey. The findings also have broader implications for the future, O’Connor said.

“Liquidity remains robust to finance new acquisitions, and overall originations are generally expected to remain steady,” he said. “But clouds are forming on the horizon as more than half of the respondents indicated that financing spreads would widen out in the next year with only a small minority indicating that any further tightening of spreads was anticipated. That trend, coupled with the continued expectation for moderate interest-rate increases and an increasing focus on cash-flow metrics as the gating issue to a financing request, underpins the feedback from an increasing minority of lenders that refinancing risks and increasing debt service burdens pose significant threats to their loan portfolios.”

A recent report from HVS Consulting and Valuation found that while hotel transaction activity in 2019 would be mostly positive, it won’t be quite at the level seen in 2018. The HVS report also cited last year’s optimism due to the election of the business-friendly Trump administration and the passage of the Tax Cut and Job Act in December 2017.

Other findings from the STR survey include:

  • 52 percent of lenders believe hotel values to be flat, compared with 61 percent last year.
  • Despite less optimism in hotel values, more than 70 percent of the surveyed lenders expect the overall hotel lending volume over the next 12 months to remain consistent with 2018 levels. More than two-thirds of lenders expect moderately wider credit spreads in 2018.
  • In the previous four years, more than half of the respondents said the location and quality of the real estate is the single most important “gating” criteria for financing requests. However, this year most respondents said that cash-flow metrics were most important.
  • For the fifth year in a row, survey respondents cited the potential for a U.S. economic slowdown and/or faltering general macroeconomic growth as the most feared threat to their hotel loan portfolio. The numbers of lenders feeling this way has increased.
  • By a wide margin, urban areas continue to be viewed as the least risky to provide financing for hotels.
  • Independent and Luxury products are considered to carry the most financing risk.
  • Senior lenders require, on average, a minimum debt yield of 9.7 percent on underwritten cash flow for an existing hotel. That average minimum is up from 9.1 percent last year.
  • Similar to last year, 10 percent of all lenders surveyed will consider non-recourse construction financing, while 90 percent of respondents do not provide construction financing.