Economic Expectations for 2015
just reviewing the financials of our clients sampled from various
states in the United States, it is evident that the majority of our
clients had higher revenue either due to higher ADR, higher occupancy,
or both. Today all fundamentals for hotels seem to be in place for
continued growth in our industry including the following factors:
- Job market:
Remaining very strong and although Americans are not seeing tangible
wage growth but are securely employed and feel confident that the job
market is going to remain strong for the next few years. Starting this
year, minimum wage increased in a number of states giving more spending
power to their people. Arizona, Arkansas, Massachusetts, and Rhodie
Island seem to have the highest increase.Twenty states are having increases starting first of this year.
- Stock market: Still
going strong in spite of couple of months of volatility due to the drop
of the international oil prices giving rise in confidence and
consequently consumer spending and travel. It does make sense for folks
seeing their IRA/401K or simply stock market account balances rise to
enjoy traveling and for businesses with higher worth and capital to
expand business and business travel
- GDP: Increased at
an annual rate of 5 percent in the third quarter of 2014, up from 4.6%
in the third quarter. Think of it as more exports than imports which
means more production than consumption and translating to more income
and more consumer spending and travel.
Factors that are positive but with some ramifications are:
- Gas prices: The
drop in the gas
prices is probably one of the most significant factors for the boost in
travel across the nation. Not sure how long it will last and at what
price it will eventually settle at, but for as long as it does last,
the resulting rise
in travel is cherished by the hospitality industry. The down side is
the loss of employment specially the temporary workers who stay at
hotels with over 75% and even at 100% occupancy throughout the year. We
hope that the oil companies can make adjustments and keep the
operations while the international oil prices are remaining very low
and under $50.
- New constructions:
Although some markets are showing serious pent-up demand for new room
supply, many markets are not starving and the hoteliers are just
enjoying increased revenue and profitability after few years of slow
down. New development in these markets will mean drop of occupancy for
the existing hotels and an ADR war with the newly developed ones.
- New Lifestyle brands:
The Millennial are gradually entering the workforce and are starting to
travel both for business and leisure. The franchisors are now on
overdrive establishing brands that appeals to the Millennial's'
lifestyle. The existing brands with large reception area painted gray
and rooms with an internet/network cable hanging from the desk maybe
suitable for some of us the baby boomers but not for Millennial who are
expecting lobbies with warm colors and ambiance for social gathering
and hotels with advanced technology features. The focus on Lifestyle
brands may take the attention off the existing brands with the
franchise incentive and marketings weighed more towards the new brands.
As if the hoteliers have not had enough to deal with since 2009, now
they have to avoid getting behind the game and try to upgrade
technologically for maintaining a share of the Millennial's' business
in the future.
Expected Status of Major Hotel Loan Programs
CMBS Conduit (non-recourse
In October of 2013 I sent an email notifying everyone that the CMBS
loans were very attractive due to the drop of the 10 year SWAP index
with the overall rate on a 10 year CMBS loan at 5.15% or so. This year,
the 10 year SWAP index has dropped even further to under 2% (1.94% as
of the today) with the 10 year term rate on a CMBS loan at 4% plus, an
amazing rate if the hotel qualifies for these loans. This is the
beginning of the year and the originators have strong appetite to
process these loans. It appears that this may be one of the best
periods since 2009 to obtain a hotel CMBS loan. Read more on these loans...
the secondary market for the hotel conventional loans have not opened
yet, the many restrictions of the Frank Dodd rule is causing the
community and commercial banks to see a rise in their available
capital. This means that in spite of closed secondary markets for
hotels, the lenders are having available capital to hold conventional
loans on their portfolio. The LTV has gone up drastically and I have in
fact seen couple of instances in which the lender has gone to 80% Loan
to Value on conventional basis. In most markets however, we see LTVs of
65% to 70%.
The key with these loans is that although the lenders are community and
commercial banks, the lender may not be necessarily in the region that
the hotel is located in. Many lenders geographically handle the entire
state or few states and that is one of the value adds by the Scientific
Capital bringing outside lenders in for a transaction. The rates for
these loans are ranging from low to mid 4s to mid 5s. for hotels with
20 or 25 year amortization.
to be the most popular program for the economy/mid-tiers and the loans
of up to 5 million. The margin over the PRIME (still at 3.25% since
2008) has dropped from the previous years as credit availability has
gone up and the spreads now range from 1.5% to 2.25% with outliers on
each end of the spectrum. These loans are 25 year loans but the rates
are adjustable, although Scientific Capital has placed few rare fixed
rate 7as in the past year.
With SBA competing with the IRS in generating new rules and
regulations, this program continues to grow in complexity and
processing time. In general, this program should be used if the loan is
higher than 5 million (so 7a cannot be used) or if the the borrower has
used up the 5 million allocation and has to use Green 504 to obtain a
new SBA loan (With Green program, unlimited number of 504 loans can be
obtained). Otherwise the cost, the processing time, and the limitations
imposed by this program make it unattractive for financing a hotel.
continue to see more construction loans even in tertiary markets. The
SBA 504 has been used in many of these construction loans allowing LTVs
of up to 80%. The underwriting for these loans relies heavily on strong
sponsorship with global positive cash flow, liquidity, and experience
with existing other hotel operations preferably in the same market.
There must be strong demand for new room supply in that market based on
the feasibility study done by the borrower.
loans are still the least favored options. Many lenders do not offer
them and cannot sell them profitably in the secondary market.
Additionally, the recent 179 million fraud
in the USDA loans has paralyzed the program and the secondary market is allegedly not interested in these loans.
underwriting criteria for these loans are similar to CMBS loans with
the difference of strong reliance on the sponsorship as well since
these loans are requiring full guarantee of the hotelier.
for further questions and discussions, please reach Ramin Mostaan at
(949) 477 5000 or email@example.com