CMBS Returns to Lodging, with Strictures
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NEW YORK CITY—In view of the Lodging Industry Investment Council survey that found most respondents expecting further improvement in the availability of debt over the next 12 months, Jake Stahler, SVP of capital markets with Hospitality Real Estate Counselors, tells GlobeSt.com that CMBS has come back to the hotel sector in a big way. “That’s had the effect of driving spreads tighter, which has been good for borrowers,” he says. Mike Cahill, HREC’s CEO and founder and co-chairman of LIIC, produced this year’s survey.
The debt source most likely to gravitate toward hotel lending depends on deal specifics. For primary markets and high-quality assets, says Stahler, “life companies and banks are being very aggressive. In secondary markets, with smaller and medium-sized loans, we’ve seen more of that get done with CMBS.”
Most of what HREC has seen of late in terms of securitized lending has been in the form of conduit deals, generally ranging between $1 billion and $1.5 billion. “You’ll have maybe 30 to 40 loans in any particular securitization,” Stahler says.
Although CMBS issuance has gathered steam since the downturn and the sheer volume of securitizations is on the rise, the size of those securitizations is likely to remain pretty much constant in the hotel space. “When the CMBS market came back a couple of years ago, one of the things investors wanted was to better understand and underwrite the collateral,” Stahler says.
Prior to the downturn, “some of the deals got as large as $6 billion of $7 billion. It was much more challenging for investors to underwrite all of the loans in the pool.” Accordingly, investors demanded a smaller pool size when the market returned in 2010, even though loan volume might be great enough to warrant larger securitizations.
As the resurgence of CMBS has been accompanied by a degree of discipline that wasn’t always present during the last market peak, so traditionally conservative lenders haven’t become loosey-goosey, either. While life companies are lending once again, “they’re still very selective as to the hospitality risk that they’ll put on their books,” Stahler says. “That’s why a lot of hospitality financing is really driven by the CMBS market. You can find life company loans where the leverage is lower; they’re very particular about the asset they’re lending against. As they should be—they’re owning the risk.”
The greater—if not unfettered—availability of debt dovetails with senior lodging executives’ outlook for the sector. As GlobeSt.com reported earlier this month, the survey of LIIC members found that 70% believe that the next 12 months represent a good time to build/develop hotels, provided that you’re selective about the product and the market. Just 18% believe that generally speaking, it’s better to buy than to build, a smaller percentage than in last year’s LIIC Top Ten.
Conversely, the current climate is also opportune for investments in lodging. More than two-thirds of respondents think the sector is in the fifth to sixth inning of a nine-inning game with regard to the lodging investment cycle, with half of respondents likening the current point in the cycle to 2005. In other words, the sector is in the midst of a longer, slower cycle.
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