Early warning signs of declining hotel performance have emerged, says Fitch Ratings. Fitch has seen an increase in the volume of hotel loans transferring to special servicing and performance metrics in seven of the top US metropolitan markets are under pressure by oversupply. However, we expect revenues across the broader US market to grow through the end of 2018, albeit slowly, and the impact on CMBS to be limited this year.
Fitch began to observe signs that the US hotel market was peaking in 2014. In the second half of that year, we began to cap revenue per available room (RevPAR) in our ratings analysis to address cash flow sustainability unless the property had added significant value-added renovations. Since then, occupancy has remained relatively flat, while RevPAR and average daily rate grew modestly. We will continue to cap RevPAR when adjusting hotel cash flow and evaluating stability. We expect RevPAR to grow a modest 1%-3% in 2018 on higher room rates.
High levels of construction activity can make RevPAR levels less sustainable. Oversupply is an issue in several key markets including Dallas, Denver, Houston, Miami, Nashville, New York and Seattle. In each of these markets the supply of rooms under construction is in excess of 20% of the number of currently available rooms.
The frequency at which hotel properties have transferred to special servicing within the last two years is another sign that the hotel market has peaked. Despite low special servicing and default volume for CMBS loans originated since 2010 (CMBS 2.0), the hotel sector makes up the highest percentage.
At the end of 2017, 44 loans totaling $691 million, or approximately 1.8% of the Fitch-rated CMBS 2.0 hotel loans by outstanding balance, were in special servicing. The majority were transferred to the special servicer during 2017 (59% by count) and 2016 (32% by count). These specially serviced hotel loans also had generally smaller balances, averaging approximately $15 million, and breakdown into the following loan statuses:
–18 loans are current or less than 30 days delinquent, $423 million –1 loan is 60 days delinquent, $9 million –9 loans are 90+ days delinquent; $82 million –6 loans are in foreclosure; $54 million –9 assets are REO; $87 million –1 loan is a non-performing matured balloon; $35 million
By loan count, the defaults were concentrated in Texas (five loans; $49 million), Louisiana (four loans; $30.8 million), North Dakota (three loans; $30.2 million) and Ohio (three loans; $25.9 million).
Contact: Melissa Che Director, US Structured Finance +1 212 612-7862 Fitch Ratings, Inc. 33 Whitehall Street, New York, NY
Mary MacNeill Managing Director, US Structured Finance +1 212 908-0785
Robert Rowan Senior Analyst, Fitch Wire +1 212 908-9159
Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com
