Hotel transaction pace set to increase in 2014

Favorable conditions will accelerate hotel lending and a need to place capital will lead to a propitious 2014 deal landscape, according to hotel investment professionals. These factors will push transaction volume: after full-year 2013 transactions reports have come back strong, 2014 is seen as a year for continued growth for pricing and volume.

Lenders have become more aggressive during the past few quarters, according to Michael Yu, VP of investments at Marcus & Millichap. “A year ago, we might have had one lender looking at an asset; now multiple lenders are looking at that same asset,” he said. “More lenders are lending because of increased competition. Lenders are starting to do deals they wouldn’t have done before.”

Debt has gotten better every month in terms of availability, said Michael Cahill, founder and CEO of HREC. “One of the reasons why hotel transaction volume may increase 30 to 40 percent in 2014 is the abundance of capital,” he said. “Debt is available at interest rates and other terms that are as favorable as they could be in the last 20 years.”

According to a recent report released by global advisory firm Grant Thornton International, the market is driving creativity. The cautious approach by traditional banks and the collapse in loan-to-value ratios has given rise to new market players, who are driving creative lending structures. Solutions involving mezzanine financing and quasi-equity debt as part of the capital structure are also affording traditional banks additional protection, thereby providing more stimulus in the market, which is resulting in more liquidity for transactions, according to the report, “Hotel Investment 2014: Finance on a different level.”

And hotel owners are reporting that access to financing has become easier. The Grant Thornton International Business Report, which presents responses from a survey of 3,000 business leaders globally, indicated that a shortage of finance was a major constraint in the hotel sector—affecting one third of businesses during 2012. In 2013, less than one quarter of hotel businesses indicated access to finance as a problem for expansion.

Commercial mortgage-backed securities have also seen a resurgence. “CMBS is widely available; there are 37 major lenders that will do CMBS, compared to seven in 2011,” Cahill said.

Data from the first half of 2013 show that CMBS lending made up 41 percent of the total lending composition, according to Real Capital Analytics (RCA). National banks are the second-largest provider of hotel lending in the same time period, at 21 percent. CMBS has been the majority hotel lender since 2010.

Yu attributed the CMBS surge to a large amount of refinancing occurring in the marketplace. “The comeback of CMBS is a big story, although it’s not for acquisition, but for refinance,” he said. “A lot of developers opened properties before the recession and now in the last 12 to 16 months there have been refi’s.”

Interest rates are a low-level concern, Cahill added. “It’s a great environment for investors,” he said. “Interest rates are low and the varied types of debt financing available allow investors to match the right debt and type to their needs.”

The Mortgage Brokers Association (MBA) expects $100 billion in CMBS issuance in 2014, up from $48 billion in 2012 and $86 billion last year. The increase in the number of CMBS lenders will lead to greater competition for new business, which will lead to tighter spreads and higher LTVs, according to the MBA.

A buyer with a CMBS deal would be able to secure a loan with 10 percent debt yield on net operating income at time of securitization; mezzanine financing is allowed up to 80 percent and is available in the 9-to-10-percent range and LTV currently tops out at 70 percent, but is expected to rise to 75 percent this year, according to the MBA.

The increased interest in the hotel sector and limited quality assets for sale is pushing buyers into secondary markets and driving price increases, Yu said. “For those type of assets, the top buyers are private equity or larger players, institutional,” he said. “You’re also seeing crossover, first-time hotel buyers that are paying a higher price.”

RCA reported that sales of hotels in non-major metro markets increased by 49 percent in 2013, while volume in the six major metros fell slightly. The Southeast and Southwest United States were strongest with volume up 82 percent and 55 percent, respectively.

In 2013, the three biggest buyers in terms of investment volume in the U.S. were Blackstone Group, GIC (Government of Singapore) and Starwood Capital Group, according to RCA.