CREFW-Winter2016

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Winter issue 2016 sponsored by CRE Finance World Winter 2016
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of hotel performance in relation to ADR, RevPAR and Occupancy.
Even if September 2015 is the latest peak in US Hotel performance
during this cycle, the peak CMBS loan delinquency rate would not
be reached until well into 2017. This is purely conjecture however,
and it is clear that outside sources are needed in order to better
make projections of what market conditions hold for hotels and
loan delinquency rates into 2016 and beyond.
Warning Signs?
There are two performance measures provided by STR, Inc. that
give at least some pause during a long period of improved metrics.
Does August 2015 represent the start of a decline in US hotel
performance, or is it simply an outlier that is not part of a trend?
• Demand – August 2015 represents first monthly decline in
YOY Demand (-0.3%) since November 2009 – 69 consecutive
months without a decline
• Occupancy – August 2015 represents first monthly decline in
YOY Occupancy (-1.4%) since January 2010 – 67 consecutive
months without a decline
September 2015 performance metrics were improved across all
major categories and so more time is needed to determine if Au-
gust 2015 is indeed a one-time aberration or the start of a cyclical
decline in US hotel operations.
What Do Other Data Sources Reveal About Hotel Perfor-
mance During 2016 & Beyond?
STR, Inc. and PwC both provide outlooks for a variety of hotel
metrics projecting through the end of 2015 and into 2016. They
are both in agreement that RevPAR growth will continue for the
foreseeable future. PwC projects that the 2015 RevPAR increase
will conclude at 6.5% and STR, Inc. at 6.6% while PwC projects
the 2016 full year increase to be 5.7% with the STR, Inc. projection
at 5.6%. Both of these are lower than previous projections,
suggesting a recent moderation in US hotel performance.
What Comes Next?
Will the CMBS hotel delinquency rate rise significantly during 2016?
Unlikely. Has US hotel performance peaked during this cycle?
Again — unlikely given the projections for RevPAR growth during
2016. However, there are reasons to be cautious. PwC projects
that occupancy levels have reached a peak across the US — at
65.6% — the highest level
since 1981. There are areas
such as the New York Metro
where supply, including new
construction, is exceeding
current levels of demand.
CMBS lenders will need to be mindful when underwriting new
loans using occupancy levels that appear to be at a high for the
current cycle. For new loans, the higher the level of reserves, the
greater likelihood the property will be able to sustain itself during
a downturn in economic conditions or property performance.
Lenders should also generally avoid interest-only loan structures
and implement basic conservative hotel principles when sizing loan
proceeds, especially at or near the top of the market.
The recent announcement that Marriott International will acquire
Starwood Hotels & Resorts Worldwide, creating the world’s largest
hotel company is a sign of consolidation of the major players within
the US. Expect this to continue. Just as it has occurred in the airline
industry, this could lead to further acquisition activity in the industry.
A transaction of this magnitude simply could not have happened
during a recession and is undoubtedly a sign of confidence in the
US hotel market by one of its biggest players.
2009 Was The Trough But Will 2015 Be The Peak For US Hotels?
“Will the CMBS hotel
delinquency rate rise
significantly during
2016? Unlikely.”