Strong Economy Propels Hotel Industry Forward, But Construction Lenders Remain Cautious
ATLANTA — Despite possible headwinds from Capitol Hill, the hospitality industry is poised for a healthy 2018. The combination of a strong economy, tax cuts and rising consumer confidence is boosting demand for hotels across the country. Meanwhile, lenders are tightening their purse strings when it comes to new development, leaving hoteliers confident that the industry is on solid footing.
Those points were among the big takeaways stemming from two separate panel discussions held last Friday morning, March 23, during the Hunter Hotel Conference. The 30th annual event drew 1,700 attendees to the famed Atlanta Marriott Marquis hotel downtown designed by the late John C. Portman.
In February, the unemployment rate remained unchanged at 4.1 percent, a 17-year low. The Consumer Confidence Index is at its highest level since 2000.
“Domestically, things are great,” said Chip Rogers, president and CEO of the Asian American Hotel Owners Association (AAHOA). “This past holiday season was the most traveled holiday season on record.”
Rogers said some credit goes to the low cost of gasoline. The price per gallon has been under $3 for four consecutive years, he pointed out. “You can see a direct relationship between how willing people are to travel and the price of a gallon of gas,” he said.
“It’s easy to get in your car and travel a long way, and it’s easy to get in a plane and take a $99 flight these days,” added Rogers. Fuel is often an airline’s largest expense after salaries, so low gasoline prices can mean great airfare deals for consumers.
The remarks from Rogers came during the “Your Government & Your Business” panel. Rogers along with Kevin Carey, executive vice president and chief operating officer of the American Hotel & Lodging Associations (AHLA), opened up Friday’s general sessions with a panel addressing government’s impact on the hotel business.
Lenders Exercise Caution
Room demand remains quite strong across the country, but lenders are still reluctant to finance new deals, and supply is leveling off.
“With the unemployment rate as low as it is and continued job growth, there’s really nothing on the horizon that worries us, other than supply,” said Jason Ourman, managing director and head of origination of real estate structured finance at Bank of America Merrill Lynch.
In December 2017, the number of hotel rooms under construction was 3.7 percent lower than December 2016, according to STR, a Hendersonville, Tenn.-based data analytics firm specializing in hospitality. This represents the largest year-over-year- construction decrease in the United States since September 2011.
“Although we’re seeing growth slow, we’re not going to fall off a cliff,” said Ourman.
The hotel industry is on the downside of the cycle in terms of supply, in large part because of disciplined construction lending. “Banks are still making construction loans, they’re just very particular about the client,” said Ourman.
That cautiousness is reflected in loan terms. The loan-to-values (LTVs) on construction loans provided by banks have decreased from a range of 55 to 65 percent previously to a range of 45 to 55 percent today, according to an analysis from JLL on the state of the debt market for hotels.
“If you’re not an existing client of the bank, it’s going to be extremely difficult to get a loan pushed up off the ground,” said Ourman.
However, more debt funds are moving into the construction financing space with a willingness to provide either non-recourse whole loans or non-recourse mezzanine loans, adds JLL.
Joining Ourman on stage during the hotel financing panel at the conference was Mark Laport, president and CEO of Concord Hospitality Enterprises Co., a North Carolina-based hotel development, ownership and management company.
If you can find the right corner to build on and get the financing to make the deal happen, it is a good time to be a builder, according to Laport. However, it’s an even better time to be a seller. Laport said Concord has three hotels under contract to sell right now, and the company going to market with another dozen or so this year.
“Cap rates are remaining low, especially given what’s happening in the lending market with higher rates and higher spreads,” said Laport. “It’s a great time to be a seller if you have good product.”
On Capitol Hill
Although industry leaders say the hotel industry entered this year on solid footing, decisions in Washington are expected to have an impact on the market.
Ourman said he anticipates that LIBOR, which tends to follow movements in the federal funds rate, will increase by an additional 50 basis points this year, consistent with the Fed’s notice to raise interest rates two more times in 2018 (If the Fed raises rates three more times, you can anticipate LIBOR will increase by 75 bps, said Ourman).
The 10-year Treasury yield, the industry’s benchmark security for low-risk lenders, is forecast to hit 3.25 percent by year’s end according to Ourman, roughly 35 basis points above its current level. As a result, there will be upward pressure on fixed-rate loan coupons. “The good thing with this, even if it is 3.25 percent, it’s still historically low and that in itself shouldn’t derail anything,” he said.
While industry leaders might not be able to have a direct impact on interest rates, lobbying on Capitol Hill can have a huge effect on the hospitality sector.
“Advocacy is important in each and every one of our businesses,” said Rogers of AAHOA. “When we become engaged as individual business owners and then collectively as an industry, that’s what makes a big difference.”
During the panel, Rogers cited industry leaders’ role in preserving the 1031 like-kind exchange. They began lobbying on the issue three or four years ago, starting off by simply explaining to members of Congress what a 1031 exchange is exactly. Year after year, they protected the provision from going away.
“With the elections in 2016, there was a realistic hope that tax reform could happen,” said Rogers. “We started this process by just protecting this one thing that works, and what happened is really amazing. There’s a list of items that happened in tax reform that were beyond anything we had hoped for.”
The major change to Section 1031 as a result of the Tax Cuts and Jobs Act was the complete repeal of personal property exchanges. But commercial real estate exchanges are subject to the same rules and regulations as under previous law — a win for real estate investors.
Whether protecting the industry from predatory litigation, promoting the industry’s labor and workforce or advocating on issues as substantial as tax reform, Carey of ALHA emphasized that having a voice is important.
“Your government will affect your business, be sure of that,” he said. “Policymakers need to hear from you. Understanding what our industry represents is fundamental to our success.”
— Camren Skelton