The survey, conducted by STR, Hotel News Now and RobertDouglas, includes responses from senior balance-sheet lenders, CMBS lenders and providers of subordinate debt financing. Together, the 66 respondents represent the source of the majority of all hotel debt originated in the United States of America (USA) in 2018, with loan balances in excess of USD10 million, according to the survey's authors.
Overall, the latest edition of the Lender Survey reflects stable credit risk spreads with most believing that asset valuations have already peaked or will do so within the next year - all in an environment with fewer expectations of further near-term interest rate increases and more believing interest rates will remain relatively constant.
The findings show that over half (52%) of lenders believe hotel values to be flat, compared with 61% last year. "It would appear that we are at an inflection point in the hotel-asset value cycle as an increasing majority of lenders are indicating that values have peaked," explains Stephen O'Connor, principal and managing director for RobertDouglas.
He notes that "liquidity remains robust" to finance new acquisitions, and "overall originations are generally expected to remain steady". But, he warns the responses highlight that clouds are forming on the horizon with more than half of the respondents indicating that financing spreads would widen out in the next year with only a small minority indicating that any further tightening of spreads was anticipated.
"That trend, coupled with the continued expectation for moderate interest-rate increases and an increasing focus on cash-flow metrics as the gating issue to a financing request, underpins the feedback from an increasing minority of lenders that refinancing risks and increasing debt service burdens pose significant threats to their loan portfolios," he adds.
The cautious outlook for 2019 follows what was a more optimistic prognosis last year. Most telling, according to Joseph Rael, STR's senior director of Consulting & Analytics was that a third of lenders (33%) believing hotel values will decrease in 2019, up from only 9% last year.
In the previous four years, over half of the surveyed lenders responded that the location and quality of the real estate was the single most important "gating" criteria for financing requests. However, that has changed this year with most respondents saying that cash-flow metrics were most important.
For the fifth year in a row, survey respondents cited the potential for a US economic slowdown and/or faltering general macroeconomic growth as the most feared threat to a their hotel loan portfolio. The numbers of lenders feeling this way has increased this year.
"The US economy is again the largest concern for hotel lenders, but this year, 40% of lenders said this was their chief concern-the most we've seen in the six years of the survey. Also, 24% of respondents think that hotel lending volume will decrease this year compared to only 11% last year," explains STR's Mr Rael.
There was a change in lenders' second-most cited fear though, for the first time in five years. Lenders are now less worried about increases in competitive supply and now more concerned with refinancing risk due to higher exit cap rates and/or higher future borrowing costs.
Other notable insights include the fact that urban areas continue to be viewed as the least risky to provide financing for hotels, and by a wide margin, while independent and luxury products are considered to carry the most financing risk. Meanwhile, the responses highlight that senior lenders require, on average, a minimum debt yield of 9.7% on underwritten cash flow for an existing hotel, up from 9.1% last year.