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CRE Finance World Winter 2016
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• 2009 started with delinquency rate of 1.72% in January
• Spiked to 8.65% in October and ended the year at 13.86%
in December
• Peak CMBS delinquency rate of 19.33% reached in September
2010 — 19 months after the largest monthly RevPAR decline
which occurred in May 2009
• Leading into a recession, CMBS delinquency rate clearly a
lagging indicator of hotel performance
• Double digit delinquency rate for 39 consecutive months from
November 2009–January 2013
• Final month of double digit lodging CMBS delinquency rate
occurred in March 2013
• Delinquency rate low of 2.9% reached in September 2015
• Delinquency rate below 5% consecutively each month since
July 2014
Is There A Link Between US Hotel Performance and CMBS
Hotel Loan Delinquency Rates?
Due to the lead time associated with the development and
construction of hotel properties, there was an increase in the
supply of new hotel rooms in the US during 2009 and 2010 at the
exact time of the worst conditions for hotels during the recession.
The impact of new supply at this time was a contributing factor to
increased loan delinquency rates.
Perhaps the strongest parallel to be
drawn between US hotel performance
and the CMBS hotel loan delinquency
rate is the lag time after a drop
in hotel performance before loan
delinquency rates increase. During
May 2009, which was the worst
month for US hotel performance
during the recession, the CMBS hotel loan delinquency rate
was at a very low 3.16% — almost the same as the September
2015 rate of 2.9%. While the delinquency rates are similar, the
market characteristics between those two dates could not be
more different. It took six months after May 2009 for the CMBS
loan hotel delinquency rate to hit double digits and 16 months
(September 2010) until the delinquency rate hit its recessionary
peak at 19.3% — when one in five CMBS hotel loans were in some
form of default.
One reason for the lag time until delinquencies increase is the
access to equity and capital that hotel owners have to support
their properties, but perhaps the greater reason is that hotel loans
have the greatest level of reserves of any property type within
CMBS. Some hotels even have seasonality reserves so that during
lean times, the property is ready to support debt service when the
property is operating at its lowest level of the year. Other reserves,
such as Furniture, Fixture and Equipment (FF&E) can provide a
cushion that during adverse economic conditions may be used to
help support debt service.
The CMBS hotel loan delinquency rate has been in single digits
for thirty consecutive months starting in April 2013 — at the same
time that US hotel performance has been experiencing consistent
improvement. While the US hotel market is in a period of sustained
improvement, the CMBS hotel delinquency rate has likewise been
in a long and steady period of improvement and now stability. In
good times, there is clearly a link between the two sets of data.
It is when the economy either improves or declines in a dramatic
or quick timeframe that the parallels between the data are harder
to discern.
Given that hotels can — or are forced to — set their rates to market
on a daily basis, it is reasonable to see that their performance
would deteriorate the fastest during a downturn since they do not
have the benefit of long term leases such as CRE and multifamily
properties. By contrast, hotels can mark their rates UP to market
the quickest of any property type
in an improving economy, so as
a property group they were the
quickest to improve while property
types such as retail continue to
lag even during 2015. CMBS loan
delinquency rates took far longer to
recover largely because foreclosures
and the sale of REO, loan workouts
and modifications all take much longer to complete and so make it
easier to understand why the delinquency rate was in double digits
for thirty nine consecutive months.
What Does Historical Hotel Data Tell About How To Predict
Future Events?
If the trends from the last recession hold true during the next
downturn, it will take between six to sixteen months for CMBS loan
delinquency rates to hit elevated and peak levels after the worst
2009 Was The Trough But Will 2015 Be The Peak For US Hotels?
“Perhaps the strongest parallel to be drawn
between US hotel performance and the
CMBS hotel loan delinquency rate is the
lag time after a drop in hotel performance
before loan delinquency rates increase.”