Hotel Lenders See Slowdown Threats, Risks

NEW YORK CITY-Although many speakers at Real Estate Media’s RealShare Hotel Investment & Finance Summit stressed opportunity in today’s current market, others, including some hotel lenders, had a more pessimistic point of view. According to survey results presented during the International Lodging Finance Council Top 10 panel, roughly 52% of hotel lender respondents believed that their lending volume would decrease over the next 12 months, 30% of which believed that it would be a significant decrease.

During the Top 10 panel, speaker Michael Cahill, president and founder of HREC Investment Advisors, said that the 41 survey respondents—which consisted of hotel lending operators throughout the country—were more pessimistic and cautious about market trends in ’08 than a year ago. He explained to the audience of over 350 that 39% believe that spreads will be flat compared to last year.

Hotel lenders see three threats, such as general economic slowdown, refinancing risks due to higher exit cap rates, and an increase in competitive supply, Cahill explained. As far as loan to value ratio goes, Cahill said that in 2007, 65% of lenders would exceed 75%, however in 2008, zero would exceed 70% and only 19% would go up to 75%.

Most respondents—88%—believe that hotel values are dropping, Cahill said, adding that they see the most risky asset as a budget hotel located in a highway market, and see the least risky assets being both luxury and upscale. Cahill ended his overview of the survey results by explaining that 76% of respondents believe “the debacle will last one to two more years” and 22% think it will pass by year-end.

The following Top 10 Panel, which included moderator Rob Stiles, EVP and principal of Cushman & Wakefield Sonnenblick Goldman; Barry Olson, managing director of Archon Capital; Bruce Davidson, managing director of West LB; and Joseph Asciolla, managing director of Calyon-Credit Agricole CIB, seemed stunned by the final result of the survey.

Asciolla said that he was surprised to hear that most lenders said the debacle would last two-plus years. “The waiting period just seems to be getting longer and longer,” he said. “Things will start to turn when banks feel more comfortable.”

All panelists agreed that in today’s market, they are looking for a strong borrower who is able to write a check. Asciolla said that “we are looking for an experienced and recognized operator for down the middle of the road transactions.”

Davidson concurred that in order for a deal to get done in today’s market, sponsorship has to be of high quality. “We need to know that the borrower can deliver that project. We are looking for deals that are in a great location with a completion guarantee and some element of recourse.” Davidson continued that “things are still slow to get done. It is difficult to get fully underwritten deals today.”