Headlines – Week of February 14, 2010
February 20, 2010
U.S. Hotel Pipeline Declines Dramatically (from Smith Travel Research)
The recent STR/TWR/Dodge Construction Pipeline Report indicates a dramatic decline in the total active U.S. hotel development pipeline. The report represents a 35.9% decrease in the number of rooms in the total active pipeline compared to January 2009. The total active pipeline data includes projects in the In Construction, Final Planning and Planning stages, but does not include projects in the Pre-Planning stage.
Midscale without F&B continues to lead all Chain Scales with rooms in construction. Hotels in this segment include such brands as Holiday Inn Express, Hampton Inn & Suites and Candlewood Suites. While this segment is the most active of all segments, it is still down over 31.6% compared to last January.
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U.S. Pipeline by Chain Scale Segment |
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|
Number of Rooms and Percent Change (January 2010 vs. January 2009) |
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| Chain Scale |
Existing Supply |
% Change |
In Construction |
% Change |
Total Active Pipeline |
% Change |
| Luxury |
107,748 |
6.3% |
3,116 |
-59.4% |
6,431 |
-53.1% |
| Upper Upscale |
601,152 |
2.4% |
9,110 |
-48.8% |
20,226 |
-48.2% |
| Upscale |
510,897 |
9.4% |
22,449 |
-58.7% |
85,379 |
-42.2% |
| Midscale w/ F&B |
510,063 |
0.4% |
6,633 |
-25.3% |
21,904 |
-26.5% |
| Midscale wo/ F&B |
826,656 |
6.3% |
31,040 |
-51.0% |
116,490 |
-31.6% |
| Economy |
766,875 |
0.9% |
3,828 |
-60.4% |
9,130 |
-55.5% |
| Unaffiliated |
1,513,538 |
1.9% |
12,294 |
-56.8% |
118,585 |
-29.8% |
| Total |
4,836,929 |
2.9% |
88,470 |
-53.5% |
378,145 |
-35.9% |
Among the Chain Scale segments, five of the seven segments reported decreases of more than 50 percent of rooms in the In Construction phase. The Economy segment experienced the largest decrease, falling 60.4%, followed by the Luxury segment (-59.4%) and the Upscale segment (-58.7%). The Midscale without Food and Beverage segment ended the month with the most rooms in the In Construction phase with 31,040 rooms.
Jones Lang LaSalle Releases Annual Survey at MBA Conference
According to findings from Jones Lang LaSalle’s annual 2010 Lenders’ Production Expectations Survey, 43% percent of respondents expect their loan production to range from $2 to $4 billion in 2010, a number that is more than double the rate that lenders reported in the 2009 survey.
Senior officials at Jones Lang stated that with more than $1 trillion worth of commercial real estate loans expected to mature between now and 2013, a majority of borrowers are placing significant importance on restructuring loans. However, many financial institutions don’t want to hold on to assets and now are coming to terms with the fact that they can no longer ‘extend and pretend’. They’re now realizing it makes good sense to move these assets off their balance sheets to create greater ability to originate loans this year.
The survey expressed the following quotes for average debt coverage ratios:
• Life companies: 2.25 for hotels, 1.30 for multifamily, 1.40 for office, 1.60 for retail, and 1.50 for industrial.
• CMBS: 1.35 for hotels, 1.25 for office, 1.20-1.25 for retail, and 1.20 to 1.25 for industrial.
• Banks: 1.50 for hotels, 1.35 for multifamily, 1.50 for office, 1.50 for retail, and 1.50 for mixed-use.
• Private equity: 1.15 for multifamily, 1.20 for office, 1.20 for retail, 1.30 for industrial, and 1.30 for mixed-use.
The sectors that most lenders would most prefer to lend, include multifamily and office.
The hotel sector stands out as the sector to which lenders are least likely to lend, although a select number of lenders indicated an interest in hotel investments given their belief that the sector is at bottom.
A small amount of lending returned to the Commercial Mortgage-Backed Securities (CMBS) market in 2009 with nearly $1 billion in loans. 48% of respondents say they expect CMBS issuance to range from $0 to $10 billion in 2010, while 27 percent predict production of $10 to $20 billion and an additional 21 percent with $20 to $30 billion expectations. In 2011, the greatest number of respondents (38%) expects CMBS issuance of between $20 to $30 billion.
The survey indicated a significant increase in the number of lenders who are selling performing and non-performing loans. These lenders are prepared to accept significant discounts in 2010 to create liquidity and to rid themselves of these non-core or problem assets. For performing loans, 29% of respondents indicated they are selling performing notes at 90 cents on the dollar and another 24% are selling performing loans between 70 cents and 80 cents on the dollar.
Bailout Panel Reports on Commercial Real Estate Losses
According to a report by the Congressional Oversight Panel dated February 10, 2010, over the next several years, failed commercial real estate loans could litter American cities with empty stores and office complexes cause hundreds of bank failures and weaken the economy.
The report, entitled Commercial Real Estate Losses and the Risk to Financial Stability states that banks face up to $300 billion in losses on loans made for commercial property and development. The Congressional Oversight Panel monitors the government’s efforts to stabilize the financial system.
The report says the defaults could lead to reduced lending and cause the eviction of families from rental properties. Bank failures also could contribute to job losses and hurt the economic recovery.
Smaller banks are more vulnerable to the losses than their larger Wall Street counterparts. That’s because commercial real estate makes up a larger portion of their portfolio.
Small- and mid-size banks have been failing at the fastest rate since the savings and loan crisis of the 1980s and 1990s. The failures are due mostly to bad loans they made for commercial projects. The Federal Deposit Insurance Corp. (FDIC), which manages bank failures and insures deposits, is under stress that will intensify over the next few years. In 2009, there were 140 bank failures under the supervision of the FDIC. By comparison, there were 25 bank failures in 2008. In 2010, it has been estimated that around 200 banks under FDIC supervision could fail.
Commercial property values have fallen more than 40% in the past three years, the report notes. Some have been unable to pay the loans. Others have stopped paying because they now owe more than the properties are worth.
Unlike residential mortgages, commercial loans are refinanced every three to five years. Between 2010 and 2014, about $1.4 trillion in commercial real estate loans will come due for refinancing. For nearly half of them, borrowers could struggle to get new financing because they’ll owe more than the properties are worth.
Last year’s tests gauged banks’ strength only through 2010. The commercial real estate threat looms largest in 2011 and beyond.
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