US hotel fundamentals are at record levels and destined to outlive the peaks of the previous real estate cycle if positive economic forecasts pan out and lenders maintain their discipline, experts at Jones Lang LaSalle tell Real Estate Capital.
JLL data shows that RevPAR — or revenue per available room — in 21 of the top 25 US markets has already exceeded peak levels. Average national RevPAR of $76 as of November was $10 higher than the 2006 peak; and average daily rate (ADR) of $116 is almost $10 greater than the 2007 peak.
The firm expects RevPAR to remain high during an “elongated recovery” that will outlast that of the previous cycle, said Kevin Davis, an executive vice president with JLL’s Hotels & Hospitality Investment Banking Group.
“RevPAR will significantly exceed its peak from the last cycle if gross domestic product (GDP) growth continues and lenders maintain healthy underwriting standards,” he said.
Hotel performance is linked closely to the general economy, and economists are predicting record GDP growth this year. A Reuters poll of 82 economists released this week forecast GDP, a primary economic indicator, growing an average 3.2% this year, which would be the fastest since 2005.
As both the economy and the hotel industry pick up, a range of new lenders — whether private equity firms or new CMBS originators — have increased competition, leading to more aggressive loans and sending loan-to-values rising. But lenders are leery about another recession and will likely stay disciplined, Davis said.
CMBS shops are currently loaning up to 80 or 85%; debt funds will lend up to 75 percent; while commercial banks and life insurance companies typically max out at 65 percent, he said. (Mezzanine debt or preferred equity would further increase leverage).
“I think there is more discipline today compared to last cycle and people have learned from past mistakes,” Davis said. “Last cycle it was not atypical to see LTVs in excess of 85% and in some cases 90% or higher. Today we’re at a point where it’s very rare to see LTVs that reach 90% or higher, and frankly 85% is fairly aggressive.”
Despite the positive growth and strong fundamentals, US hotel transaction volume still pales in comparison to the market peak. The $25bn in 2014 was a post-recession peak and a 35% increase from the previous year, but fell well short of the $31.9bn and $47.1bn recorded in 2013 and 2014, respectively.