The state of the commercial mortgage-backed securities market is one of the biggest wild cards affecting the pace of U.S. hotel investment in 2012, according to new research from Jones Lang LaSalle Hotels.
Long considered the most liquid hotel investment market in the world, the U.S. went into a two-year slump in 2009 and 2010 before making a comeback in 2011 with approximately US$15.2 billion in transactions.
“CMBS loans provide much needed liquidity to borrowers as local and regional lenders are still in the process of repairing their balance sheets, leaving limited capacity, large money center banks and life companies to fund the majority of on-balance sheet loans,” said Bill Grice, senior vice president of Jones Lang LaSalle Hotels.
The firm forecasts that 2012 deal volume will continue at last year’s pace with approximately US$15 billion in total transactions, as institutional and foreign investors return to the market while REITs pull back. The unknown factor that could affect the pace of acquisitions is the strength of the CMBS market.
CMBS loans represent about one third of outstanding U.S. hotel debt. With US$30 billion in CMBS loans reaching maturity in 2012 — many of them on properties valued below their current loan amount — it is likely that many loans will be extended for three or more years, providing additional time for property values to rebound and loans to further deleverage. In the meantime, the large overhang of loan maturities marks a period of highly attractive investment opportunities for investors who believe that market fundamentals will continue to rebound.
“Given that banks continue to push out maturities to 2015-2017, all eyes will be on how the pricing and appetite for floating-rate CMBS evolves in 2012,” said Mathew Comfort, executive vice president of Jones Lang LaSalle Hotels. “Swaps and spreads will continue to be volatile during 2012 and investors need to carefully time when to lock in an interest rate.”
The availability of equity capital for high-quality hotel transactions is expected to remain high with the re-emergence of opportunity funds, value-added funds and core-plus funds, which typically allocate 15% to 20% of their equity to hotel real estate, Jones Lang LaSalle Hotels reported. To mitigate any negative impact of individual asset performance, loan originations may be capped at US$100 million, with larger deals requiring a consortium of lenders to spread out the downside risk.
“The overhanging loan maturities create tremendous opportunities for investors seeking to obtain loan-to-own note sales, by reducing costs on the lending side and thus creating real value for both parties,” said Jeffrey Davis, managing director of Jones Lang LaSalle Hotels. “Recently we’ve seen an increase in debt sales by lending institutions, particularly note sales, and this trend will continue in 2012 as lenders become increasingly motivated to get paper off their balance sheets.”