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Banks Gird for Storm of Hotel Defaults in 2009
(KANSAS CITY, MO) -- Banks around the country are preparing fresh spreadsheets on a new wave of mortgage defaults -- this time coming from the hotel industry, according to industry professionals themselves.
"Banks will likely take many of those properties back and place them on the market," Niehaus says. "With the hotel economy expecting to have a tough year, the gap between buyers and sellers will likely narrow."
Niehaus says his forecast is based on information HBI has received from more than 100 financial institutions in the past few months. He says HBI is the nation's largest hotel brokerage organization with over 30 offices coast-to-coast.
"We expect to see a mini-surge of activity from owners who want to sell in this tax year," Niehaus says.
He finds "the lack of financing has had the most dramatic impact on hotels that sold for more than $20 million." But hotel deals under $15 million, "which make up the bulk of the hotel industry inventory and HBI sales, continue to get done because financing, primarily from local banks, continues to be available."
Niehaus says "the key (to obtaining financing) is to have a proven track record as an operator and a long-term relationship with the lender." Major brands also are preferred product categories in loan considerations, he adds.
For the 2008 first three quarters, HBI tracked 216 public transactions across the industry, compared to 582 in the same period a year earlier.
Average transaction size declined from 199 rooms to 167 rooms and the average price per room fell to $108,000, compared to $120,000.
Total dollar volume for the 2008 first three quarters was $6.4 billion, compared to $17.4 billion in 2007.
HBI itself reported 57 transactions for the 2008 first three quarters, compared to 118 for the like 2007 period.
Capitalization rate for HBI transactions fell to 8.67 percent, compared to 9.17 percent, which was 'not statistically significant," Niehaus says.
First mortgage loan to value was 71.0 percent with a 7.2 percent average first year interest rate, compared to a 74.5 percent first mortgage loan to value with an average first year interest rate of 8.0 percent last year.
Niehaus notes that closing of transactions this year continues to take one to two months longer to wrap up than in 2007.
"Lenders are being more cautious and require more equity, usually 30 percent or more," he says. "We see that trend continuing through 2009."
The broker says "the key exception is SBA loans under $10 million which require as little as 20 percent equity. Fortunately, interest rates are declining and are at historically attractive rates."
He adds, "as in past cycles, cash is king."
H. Brandt Niehaus
"A lot of loans will be coming due in 2009 and the properties are now assessed lower than the loan value," says H. Brandt Niehaus, president of Kansas, MO-based Hotel Brokers international and also of Louisville, KY-based Huff, Niehaus & Associates."Banks will likely take many of those properties back and place them on the market," Niehaus says. "With the hotel economy expecting to have a tough year, the gap between buyers and sellers will likely narrow."
Niehaus says his forecast is based on information HBI has received from more than 100 financial institutions in the past few months. He says HBI is the nation's largest hotel brokerage organization with over 30 offices coast-to-coast.
"We expect to see a mini-surge of activity from owners who want to sell in this tax year," Niehaus says.
He finds "the lack of financing has had the most dramatic impact on hotels that sold for more than $20 million." But hotel deals under $15 million, "which make up the bulk of the hotel industry inventory and HBI sales, continue to get done because financing, primarily from local banks, continues to be available."
Niehaus says "the key (to obtaining financing) is to have a proven track record as an operator and a long-term relationship with the lender." Major brands also are preferred product categories in loan considerations, he adds.
For the 2008 first three quarters, HBI tracked 216 public transactions across the industry, compared to 582 in the same period a year earlier.
Average transaction size declined from 199 rooms to 167 rooms and the average price per room fell to $108,000, compared to $120,000.
Total dollar volume for the 2008 first three quarters was $6.4 billion, compared to $17.4 billion in 2007.
HBI itself reported 57 transactions for the 2008 first three quarters, compared to 118 for the like 2007 period.
Capitalization rate for HBI transactions fell to 8.67 percent, compared to 9.17 percent, which was 'not statistically significant," Niehaus says.
First mortgage loan to value was 71.0 percent with a 7.2 percent average first year interest rate, compared to a 74.5 percent first mortgage loan to value with an average first year interest rate of 8.0 percent last year.
Niehaus notes that closing of transactions this year continues to take one to two months longer to wrap up than in 2007.
"Lenders are being more cautious and require more equity, usually 30 percent or more," he says. "We see that trend continuing through 2009."
The broker says "the key exception is SBA loans under $10 million which require as little as 20 percent equity. Fortunately, interest rates are declining and are at historically attractive rates."
He adds, "as in past cycles, cash is king."
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