"In the softened economy, lenders are again controlling hospitality development and the ability of property owners to dispose of the real estate," says Webb, a former hotel management executive.

He says high loan-to-value requirements "have simply made the sale and acquisition of hotel and motel properties prohibitive."

Asking prices on most hotel properties haven't yet dropped but the lack of available debt is hurting investment and development.

"Declining interest rates have allowed capitalization rates to remain steady but have dramatically slowed the number of sales in the market," Webb tells GlobeSt.com. "The primary factor in declining sales is the lack of new debt available."

The broker says, "Most lenders today have equity requirements in the 30% to 35% range as a minimum and have returned to demanding a 1.4 to 1.5 debt coverage ratio, after an allowance for management and reserves for replacement."

Webb isn't seeing many properties being pulled from the market, however. "Sellers are not generally pulling back but buyers, because of the challenging terms available, are clearly more discriminating" today than they were a year ago.

There isn't a surge to develop new properties in the current economic environment either, the broker says. "Sellers are also buyers, so they are cognizant of market conditions," Webb tells GlobeSt.com.

"There is no rush to market with healthy hotel product," he says. "As lenders become increasingly uncomfortable with delinquent mortgages in a slowing business cycle, some more-distressed properties may be forced onto the market."

The average capitalization rate is still holding around 11% in the broad market with a general range being from 10.5% to 12%, Webb says.

He notes that replacement costs are continuing to climb. "That spiral may, in fact, drive a new round of major renovations of older product."

As for certain product categories faring better than others in economic slowdowns, Webb suggests the extended stay hotels group may be a sleeper.

"We have seen in recent years the development of all interior corridor product, often without the balconies, which were always part of the pre-1980s design,," the broker says. "That design change causes the mid-priced product to more closely resemble the more upscale hotel".

He says, "The guest does not, therefore, feel as though he or she is sacrificing so much quality to step down a tier in tight economic times. It is reasonable to expect that the ultra-luxury rate tier will lose some business to the luxury tier and that the luxury grouping will suffer some loss to the mid-price product.

Webb adds, "Since the only product in the marketplace that is thought to be under-supplied is the extended-stay segment of the industry, as more units come online, expect to see its suite product attract business from all hotel price segments."

Instant Insights /

GlobeSt.com EXCLUSIVE: Lenders Hurt Hotel Development

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