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Hotel Industry Likely to See Belt Tightening in 2017

Column: industry Tag: Hotel Industry,RevPAR growth,trends Published: 2017-01-16 19:50 Source: Author:

Hotel Industry Likely to See Belt Tightening in 2017
Scott Silver, CEO of boutique financial advisory firm Hospitality Funding, says that while the lodging industry is currently enjoying high overall performance, tapering RevPAR growth has made lenders a little less eager to take on new projects. In preparation for next year, LODGING asked Silver what he thought hoteliers should know going into 2017. Here are four trends Silver saw in 2016, as well as what he believes we can expect in the year to come.

Overall tightening of credit. “We started seeing this trend in Q4 of 2015 and into 2016. Both banks and commercial mortgage-backed security (CMBS) lenders are tightening up their available credit. On the bank side, they had been pretty aggressively lending for the last several years for hospitality projects so they started to pull in the reins. For CMBS, underwriting has become more stringent.”

Moderated rate of growth. “RevPAR growth has slowed down. It hasn’t declined, but it’s definitely slowed. As a result, lenders seem to be thinking that we’re in the latter stages of the cycle, and therefore we can’t be as aggressive. We’re also seeing a significant pullback in the availability of construction finance for new development. It’s not a complete pull out, but lenders are becoming much more conservative.”

Additional loan costs. “On Dec. 24, risk retention rules from the Dodd-Frank Wall Street Reform and Consumer Protection Act kick in. This will add approximately 25 to 30 basis points of additional costs to any loan. So if you’re underwriting a 5 percent loan, you’re actually at 5.25 percent. We’re already beginning to see CMBS lenders begin to bake that premium into their loans.”

Challenges for marginal projects. “Developers with good projects, good markets, and good flags should continue to have reasonable access to capital, but the marginal projects will have a more challenging time. I don’t think this is a bad trend because it allows the industry to moderate new supply to where deals make sense, which will help the health and longevity of the cycle.”

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