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NEW YORK CITY—The capital markets continued an impressive run in 2013 as liquidity poured into all sectors of the debt markets and the pool of lenders broadened. The influx of liquidity from the CMBS market was the most notable development, where total CMBS volume jumped from $48 billion in 2012 to $86 billion in 2013, a 78% increase. Hospitality lending contributed a disproportionate share of the volume increase, going from 15.7% of all CMBS origination in 2012 to 23% of all CMBS origination in 2013. Specifically, hospitality origination increased from $7.6 billion in 2012 to $20.3 billion in 2013, a 167% increase, which included floating and fixed rate loans executed in either pooled conduit transactions or stand-alone securitizations.  

Much of this uptick resulted from the re-emergence of the floating rate CMBS market, which had been largely muted since the credit crisis. Approximately $5.9 billion of floating rate CMBS hotel loans were securitized in 2013, compared to $1.3 billion in 2012, a 342% increase! Noteworthy transactions in the market included a $3.5 billion fixed and floating rate financing for Hilton Hotels, a $950 million financing of the former Innkeepers portfolio and an $800 million financing of the Boca Resorts portfolio.

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While the chart above shows a steady rise in CMBS hospitality lending volume since 2009, it's still almost $13 billion lower than the total for 2007. It's worth noting that in the last cycle, the existence of a liquid and highly accommodating floating rate CMBS market was a primary catalyst for many of the large "public to private" deals that were completed including Hilton, Extended Stay, LaQuinta, Equity Inns and Highland Hospitality. With the current lofty valuation of public hotel companies, the floating rate CMBS market could be the catalyst for the reverse trade where many large private hotel owners go public, similar to the recent move by Hilton. 

In addition to being one of the few financing outlets for large, crossed portfolios of hotels or for large single asset financings, the floating rate CMBS market is significant for hospitality for two other reasons:

• The market provides relatively high leverage with attractive pricing compared to other floating rate financing alternatives. Specifically, floating rate CMBS loans are currently being originated with pricing from the high 300's to the high 400's over LIBOR for leverage as high as 75-80% LTV. This compares to 55-65% LTV loans from bank lenders from the low-200's to the high 300's and 70-75% LTV loans from debt funds that are typically in the mid- 400s to the mid-500s.
• The LIBOR index is well-correlated with GDP, similar to RevPAR, and thus the cost of floating-rate debt capital generally moves directionally with changes in RevPAR, making it an attractive hospitality financing vehicle.

Away from CMBS, balance sheet lenders continued to get more aggressive in 2013. Across the spectrum of commercial banks, debt funds/mortgage REITs and life insurance companies, spreads continued to compress. For example, over the course of the year, certain commercial banks that had previously been quoting deals at spreads in the low-300's over LIBOR lowered their most aggressive spreads to the low-to-mid-200's over LIBOR. Similarly, at the beginning of the year, the most competitive debt funds quoted hospitality deals at floating rate spreads in the high 400's/low 500's over LIBOR, and by the end of the year, we saw debt funds quoting similar deals in the high 300's.  

Looking ahead to 2014, Jones Lang LaSalle anticipates the debt markets will continue to improve as new lenders enter the market and drive greater competition. Major investment banks such as Credit Suisse have recently re-started their CMBS businesses, and a number of former Wall Street lending executives have also raised capital to establish lending platforms. Further, as we get deeper into the current hospitality cycle, lenders will have greater confidence making hotel loans, as most properties will have experienced positive year-over-year RevPAR metrics going back to 2010. All of these factors, combined with an improving economic outlook, should drive further spread compression over the next 12 months. 

The only potential hurdle we see is the possibility of modestly higher fixed rates as Treasuries are likely to rise as the Fed continues the "tapering" of QE3 over the course of 2014 and as the economy improves. Perhaps some of this expected rise in the Treasury indices may be offset by spread tightening, but likely not completely. As such, fixed-rate loan coupons could inch up modestly over the course of the year.  Floating-rate loan coupons, on the other hand, are likely to decline as credit spreads compress, while the LIBOR index is expected to remain stable throughout 2014.

In conclusion, the debt markets are by far the healthiest they have been in the last seven years, as new lenders enter the market, spreads compress and lending volumes rise dramatically. These strong dynamics will more than offset any modest rise in fixed rates that may occur this year, noting borrowers will continue to benefit from running a competitive process in order to select a lender that will provide an optimal execution. As always, the Hotel Investment Banking professionals at Jones Lang LaSalle are prepared to assist you in navigating these markets and securing optimal capital solutions.

Mathew Comfort is managing director of Jones Lang LaSalle's Hotel Investment Banking. The views expressed in this column are the author's own.