The fundamentals of hotels and hotel financing have been on a straight vertical incline upward from the doldrums of 2009 until present day 2015. Generally speaking, average daily rate and occupancy have gone up annually, while cap rates have plunged since the financial crisis. So a correction, or at least a pause, is inevitable.
But how much and how long of a pause or correction are the big questions surrounding the market. If one recalls those dark days just six years ago, consumers and businesses drastically cut back on their travel plans, which hampered hotel fundamentals at the same time that hospitality finance was drying up. Few people believe that we will relive those dark days, but let’s look at where we are today.
The general economy aside, new supply is the wild card affecting the hotel market. In New York City alone, the number of hotel rooms has increased from 93,254 in 2009 to 112,940 in 2014, with another 27,273 either under construction or about to break ground. Much of this growth has been fueled by the reversal of lenders who were skittish about funding hotel construction loans from late 2008 to 2011. With Libor remaining at record lows hovering below 1 percent, a hotel construction loan at Libor plus 300-350 basis points (the off-the-shelf rate for such loans) was the elixir that developers needed to start new projects.
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