Great article from Hotel News Now that looks at the possible challenges facing hotel financing over the next decade:
Published by: Zak Selbert/Hotel News Now
Published date: December 2018
This economic cycle has been long by historical standards. Hotels have been improving their performance for ten years straight, despite headwinds including Airbnb, oversupply, rising costs and technological disruption.
As a hotel owner looking for vision into the capital markets, one might forget that we are in the midst of tremendous change and market evolution. We might forget because hotel performance continues to improve no matter what, keeping capital markets stable. But aligning financing with vision should not include a look backward at ten years of stability. It should look forward at the next ten years, which is unlikely to be stable.
I’ve been wrong for many years about the timing of rate increases and an economic cycle turn. Fortunately, this has given the market time to recover from the pain of the 2008 recession without immediate PTSD. But it’s time to consider that the threats the market faces will at some point materialize. Maybe that’s next year, or maybe that’s five years from now, but the rules of cycles haven’t changed, and at some point, we’ll see an impact from the various threats hotels are facing.
Capital markets are forward-looking, but underwriting isn’t. This is prudent and it should be used to the benefit of hotel owners. Property owners should think about right-sizing their debt levels for the next ten years, now, while all forms of capital are still readily available. Historical performance should inform desired debt levels but so should expectations about the next ten years. It’s best to take advantage of leverage without going too far.
The inevitable risks hotels face should be met head-on with capital structures that are put into place to withstand change and instability. Non-recourse, fixed-rate loans continue to be attractive late in the cycle, and 10-year terms surely will last through the next cycle without negative impact. Floating rate loans should be closed with caution given the expectation of rising rates.
To read the entire article on Hotel News Now, click here.