Hotel properties are making up a larger share of CMBS 2.0 deals. While the share of retail property loans being packaged as commercial mortgage-backed securities has declined substantially since 2010, hotel properties have increased year over year since 2010, and now account for 13% of 2012 issuance for multi-borrower CMBS transactions, according to new analysis from Wells Fargo Securities.
And while analysts expect the trend may not last much longer, hotels could still prove to be a better-performing property sector than office, industrial or retail.
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"While we are forecasting continued strong performance for the hotel sector relative to the core property types of office, retail and industrial, we see the recovery in hotel fundamentals likely to slow through the next year," wrote Marielle Jan de Beur, senior analyst for Wells Fargo Securities.
"Our current forecast calls for decelerating RevPAR (revenue per available room) through 2013; however, we still anticipate positive revenue for the sector through the forecast," Jan de Beur added. "A slowing global economy and a disappointingly slow economic recovery in the United States will likely limit continued gains in occupancy needed for increasing overall revenue gains."
The three major hotel performance metrics of occupancy, average daily rate (ADR) and RevPAR show that gains on a year-over-year basis have slowed in 2012. May 2010 marked the first increase in RevPAR over the prior-year period since the downturn. RevPAR gains in 2011 were up 8% to 9% over each month from 2010, but the gains in 2012 have slowed from 2011 year-over-year gains. Through September 2012, RevPAR is up 7.6% from 2011, a decrease from the prior year's gains.
"Moderate economic growth in the United States and the slowing global economy will likely keep occupancy levels range-bound, capping RevPAR growth at least until stronger economic growth can stimulate more leisure and business travel," Jan de Beur said. "Given the current economic environment, we do not expect much more upside to occupancy gains in the near term, at least until the economy can gain traction and grow at a stronger pace."
A limited new supply of hotel rooms will likely act as a buffer helping to limit (but not eliminate) any adverse effects in hotel room demand due to the global economic slowdown, according to Wells Fargo. A strong increase in new supply from 2008-2009 was poorly timed and came online in the midst of the recession just as demand was waning. Average annual new supply of 1% from 2010-2013 is trending well below the long-term annual average of 1.9%, which should help buffer the hotel sector during a slowing economy.
According to CoStar Group, on a year-over-year basis, transaction volume for hotel property sales through the third quarter of this year is down 33% for the same period in 2011 with $11.13 billion this year vs. $16.52 billion a year ago.
Since peaking at 17.39% in October 2010, the 30+ day delinquency rate for hotel loans in fixed- rate CMBS conduit transactions has steadily declined, according to Wells Fargo. Currently, the hotel delinquency rate stands at 11.03%, the lowest level since December 2009.
The amount of newly delinquent hotel loans each month has continued to subside as well, declining to 14 loans per month on average so far for 2012 from 19 loans per month on average for 2011.
The delinquency rates have fallen substantially from the peaks for loans backed by full-service and limited-service hotels. The delinquency rate for full-service hotel loans has stalled out at around 13% in 2012, whereas the delinquency rate for limited-service hotel loans has continued to decrease to around 8%.
"There has been a decline in the amount of newly delinquent limited-service hotel loans in 2012, but the amount of newly delinquent full-service hotel loans has not lessened," Jan de Beur said.
Liquidation volume for hotel loans this year is below 2011 levels but remains significant. As of October, 89 hotel loans were liquidated with losses totaling $529 million, compared to total losses of $725 million over the same time period in 2011.
"While we anticipate slowing hotel revenue gains through 2013, we still see the sector outperforming the office, retail and industrial sectors," Jan de Beur concluded. "The slowing global economy and an underwhelming economic recovery in the United States will likely limit occupancy gains making it difficult for hotel operators to increase room rates, thereby slowing increases in RevPAR growth on a year-over-year basis."
"A shallow supply pipeline should mitigate downside to a slowing economy, helping keep hotel revenue on a positive track. Better fundamental performance is translating into declining hotel delinquency rates in CMBS, which should benefit CMBS bondholders with exposure to hotel properties," she said.
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