November 29, 2011
Lodging Asset Values in Recovery
Despite inconsistent economic news, increases in lodging demand and property-level net operating income (NOI) have most industry participants feeling optimistic that hotel property values are heading upward. The 2011 edition of the Hospitality Investment Survey conducted by PKF Consulting sheds some light on the market and transaction factors that are influencing this line of thinking.
Here are some the findings from the survey:
- Overall capitalization rates for all hotels decreased 110 basis points when compared to 2010. This reflects survey respondents’ reaction to the more attractive debt environment, as well as the anticipation that property level NOI will continue to increase. Investors continue to place a premium on the full service segment due to its greater upside, high barriers to entry and the current difficulty to obtain construction financing. Terminal capitalization rates also declined compared to our previous survey, however to a lesser degree.
- Concurrent with the decline in capitalization rates, discount rates, or un-leveraged IRR’s, for hotels decreased to 11.75 percent. The 253 basis point spread between the overall capitalization rate and discount rate suggests investor yield requirements have lowered when compared to last year, likely due to the decreased level of risk and overall landscape of the current lodging market.
- Equity yields followed a similar downward trend, though hotel investors continue to expect handsome returns when compared to other forms of investment real estate. Cash-on-cash returns experienced little change compared to what we learned in 2010, and the average holding period indicated by the survey respondents decreased slightly.
- Overall deal volume, particularly among real estate investment trusts (REITs), has surged since the beginning of 2011. With a lower overall cost of capital and financing flexibility that includes equity along with debt, REITs are aggressively targeting hotel properties in all segments, particularly high quality assets in major markets. Leading the way is Ashford Hospitality, who spent $1.28 billion on the 28-property Highland Hospitality portfolio. Pebblebrook Hotel Trust (spending over $780 million on 10 hotels) and Apple REIT (spending roughly $475.8 million acquiring over 20-hotels) have also been active players.
- Debt service coverage ratios also decreased and are now in line with 2008 levels, suggesting that lenders are starting to “loosen up” with regards to their underwriting. This year’s survey indicated that interest rates reached their lowest point in recent history at 6.69 percent, a decrease of 84 basis points when compared to 2010. Loan-to-value ratios increased compared to last year, but remain well below 2007 levels.
2012 Outlook Remains Positive for U.S. Lodging Industry
PKF Hospitality Research also released their preliminary Hotel Horizons® updated forecast for the U.S. lodging industry. Based on performance data through September of 2011 (provided by Smith Travel Research), and Moody’s Analytics’ October 2011 domestic economic forecast, PKF-HR believes that RevPAR in the U.S. will increase by 8.1 percent in 2011, and rise another 6.2 percent in 2012.
The 8.1 percent revised RevPAR forecast for the current year represents a 90 basis point increase over their previous forecast released earlier this year.
Because of the accelerated performance in 2011, the PKF forecast change in RevPAR for 2012 has been lowered 110 basis points from 90 days ago to still-attractive 6.2 percent.
PKF is optimistic for lodging’s performance in 2012 and is based on the economic forecasts of Moody’s Analytics. Real personal income is projected to rise, and is the most important element of Gross Domestic Product (consumer spending and business investment).
Best Housing Markets for Big Bargains
A recent report from the financial analysis firm 24/7 Wall St. has identified the housing markets expected to offer some of the biggest discounts for home buyers. Many of these markets have been plagued with large gluts of foreclosures that have dragged down prices. Six of the ten markets on the list have had median home prices fall to less than half what they were five years ago.
All of the top 10 most popular metros have experienced double-digit price declines from peak to trough, with seven out of 10 experiencing declines approaching 50 percent or more, according to figures from the Federal Housing Finance Agency.
Half of the top10 metros are in Florida, two are in Southern California, and one is in Nevada — specifically the Las Vegas metro area.
Eight out of 10 metros had median list prices of less than $150,000 as of Nov. 15, with the exceptions of both California markets.
The following are the top five housing markets which offer home buyers some of the biggest discounts:
1. North Port-Bradenton-Sarasota, Fla.
Median home price: $170,000
Home value decline from peak: -51.4%
Predicted change in home value through 2Q 2012: -6.5%
2. Riverside-San Bernardino-Ontario, Calif.
Median home price: $180,000
Home value decline from peak: -55.4% (14th biggest decline)
Predicted change in home value through 2Q 2012: -14.8%
3. Charleston-North Charleston, S.C.
Median home price: $200,000
Home value decline from peak: -23.3%
Predicted change in home value through 2Q 2012: -1.6%
4. Fort Lauderdale-Pompano Beach, Fla.
Median home price: $199,000
Home value decline from peak: -48.4%
Predicted change in home value through 2Q 2012: -9.2%
5. Cape Coral-Fort Myers, Fla.
Median home price: $106,000
Home value decline from peak: -59.3%
Predicted change in home value through 2Q 2012: -12.2%
Posted by Scott R. Lodde
November 18, 2011
Smith Travel Research Updates U.S. Hotel Forecasts
The U.S. hotel industry is expected to end 2011 with a 4.0-percent occupancy increase to 59.9 percent, a 3.6-percent increase in ADR to US$101.58, and a 7.7-percent increase in RevPAR to US$60.81. Supply in 2011 is forecasted to rise slightly (0.7 percent) and demand is expected to end the year with a 4.7-percent increase.
Smaller increases are forecasted in all three key performance metrics for year-end 2012, according to STR’s updated industry forecast.
STR revised 2012 forecast includes:
- 0.2-percent increase in occupancy to 60.0 percent;
- 3.7-percent jump in average daily rate to $105.29; and
- 3.9-percent rise in revenue per available room to $63.18.
STR also predicts that 2012 year-over-year demand will increase 1.1 percent and supply will rise 0.9 percent.
The change in the forecast is a result of the continuing global economic uncertainty and the tougher year-over-year comparisons the industry will face in 2012.
In 2011, STR is forecasting a 4.0% occupancy increase to 59.9%, a 3.6% increase in ADR to $101.58, and a 7.7% increase in RevPAR to $60.81. Supply in 2011 is forecasted to rise slightly by 0.7% and demand is expected to end the year with a 4.7% increase.
Large increase in hotel foreclosures expected next year
A recent story by Bloomberg quotes Robert Sonnenblick, chairman of Sonnenblick Development LLC, who says that there will, in fact, be a “huge increase” in U.S. hotel foreclosures next year as debts come due coupled with a still pervasive lack of financing.
While the past couple of years have been rife with tales of U.S. hotel foreclosures due to economic calamity, the thought was that the hotel recovery would be the anodyne needed to stem the tide.
According to Sonnenblick, the wave of commercial mortgage-backed securities needing replacement debt is going to be a close-to-catastrophic problem. He believes that the end result of all of this is “you’re going to see a huge increase of hotel foreclosures.”
According to Realpoint, the securities ratings firm owned by Morningstar Inc., approximately $21.7 billion in CMBS on 232 hotels is coming due in the next 12 months and need to be refinanced.
While the hotel industry has begun to recover, particularly in gateway cities, financing for new construction continues to be an impediment. Part of the problem is that the expectation that hotels will come on the market makes lenders skittish to lend.
However, this is not just a U.S. problem. Bloomberg reports that European banks “will be forced to sell more distressed commercial property loans in the coming year, as more borrowers default.”
Two Real Estate Reports Suggest Florida Rebound
In Realtor.com’s “Top Ten Turnaround Report,” six Florida cities were considered good bets for an upswing in sales. Realtor.com, which is owned by The National Association of Realtors®, says it created a formula to rank a city’s turnaround potential based on recent price appreciation, changes in inventory, median age of inventory, number of Realtor.com searches by visitors and area unemployment.
Realtor.com attributes the Florida cities’ success to year-over-year home price increases, reductions in inventory, lower unemployment rates and, in some cases, an upswing in international buyers.
Realtor.com’s turnaround list includes:
- Miami: Ranked No. 1 in the report, Miami hit the top based on “a healthy inventory that is only half the size from a year ago,” a lower foreclosure rate than the national average, and an increase in condo sales.
- Orlando: While No. 2, Realtor.com says Orlando had more home searches than any other city when compared to the total number of listings. It also had a significant drop in the number of foreclosures.
- Fort Myers-Cape Coral: Median prices in Fort Myers-Cape Coral have increased year-over-year, foreclosures are down, inventory is lower and foreign buyers are attracted to the area’s real estate prices.
- Phoenix-Mesa, Ariz.
- Fort Lauderdale: Inventory has decreased and prices have increased, says Realtor.com.
- Sarasota-Bradenton: About one in 10 foreign buyers look in Sarasota-Bradenton for a home, Realtor.com says. Listing prices have increased and inventory has decreased.
- Lakeland-Winter Haven: According to Realtor.com, the number of distressed sales has decreased significantly and prices have gone up.
- Boise City, Idaho
- Fort Wayne, Ind.
- Ann Arbor, Mich.
Trulia recently debuted a new report that analyzed its home searches.
In one study, Trulia looked at the number of people who searched for housing in a city (including renters) and compared it to the number of city residents looking elsewhere for a home. An area with a high number of inbound searches and a low number of outbound searches suggests an increased demand for housing according to Trulia.
According to the study, the North Port-Bradenton-Sarasota area had six times more searches by inbound people than outbound people, landing it in the list’s No. 1 position, but four other Florida cities also made the top 10 list:
- North Port-Bradenton-Sarasota
- Riverside-San Bernardino-Ontario, CA
- Charleston-North Charleston-Summerville, SC
- Fort Lauderdale-Pompano Beach-Deerfield Beach
- Cape Coral-Fort Myers
- West Palm Beach-Boca Raton-Boynton Beach
- Fort Worth-Arlington, TX
- Oxnard-Thousand Oaks-Ventura, CA
- Las Vegas-Paradise, NV
Trulia also looked at the Chicago and New York City markets to see where residents wanted to move.
Three Florida cities ranked in the top 10 for Chicago residents: Tampa-St. Petersburg-Clearwater (No. 4), Cape Coral-Fort Myers (No. 6) and Orlando-Kissimmee-Sanford (No. 10).
In New York City, five Florida cities made the list: Miami-Miami-Beach-Kendall (No. 2), Orlando-Kissimmee-Sanford (No. 3), West Palm Beach-Boca Raton-Boynton Beach (No. 5), Fort Lauderdale-Pompano Beach-Deerfield Beach (No. 6) and Tampa-St. Petersburg-Clearwater (No. 7).
see Realtor.com Top Ten Turnaround Report – here
see Trulia Metro Movers Report – here
Posted by Scott R. Lodde
November 11, 2011
CMBS Delinquencies Hit Could Go Higher
According to Trepp LLC, the CMBS delinquency rate moved significantly higher in October.
The delinquency rate for U.S. commercial real estate loans in CMBS moved up 21 basis points to 9.77%. The CMBS delinquency rate is now at its second highest level ever. Only the 9.88% reading in July 2011 was higher according to the report.
After experiencing a big dip in the delinquency rate in August, the rate has now increased for two straight months.
Morningstar’s structured credit research and ratings subsidiary RealPoint, also reported that there are future delinquency concerns on the horizon.
Morningstar reported that there are a number of loans on CMBS servicers watch lists that have never met pro-forma underwritten expectations or loans that have experienced significant performance declines. This includes a large number of loans on the master servicer watch lists that remain current in payment but which may ultimately default based upon a denial of requests for loan modifications or debt restructuring or a decision by borrowers to surrender the collateral.
By property type, the greatest future risk exposure by unpaid balance is found in office collateral, while retail collateral is by far the largest by loan count, Morningstar reported.
RevPAR Growth Expected to Continue Despite Economic Uncertainty
According to PwC US as reported in their updated lodging forecast, the momentum of the recovery in the lodging sector is expected to continue in 2012, despite the overhang of uncertainty. The improved outlook is in part due to the recent strength of business travel, which, despite greater uncertainty in the economic outlook, and resultant business and consumer confidence, has recovered strongly.
Lodging demand during the third quarter exceeded the previous peak achieved in the first quarter of 2006 by 3.1 percent, on a seasonally adjusted basis. This recent strength in demand recovery is expected to continue to drive revenue per available room (RevPAR) growth in 2011 and 2012. The PwC forecast now expects RevPAR growth of 7.8 percent and 6.5 percent in 2011 and 2012, respectively.
PwC’s updated quarterly lodging forecast reflects a revised macroeconomic forecast from Macroeconomic Advisers, LLC, which now expects improving economic growth during the remainder of 2011 and in 2012. Macroeconomic Advisers revised upward its forecast for real gross domestic product (GDP) growth in the second half of 2011 for the first time in eight months. As a result of this revision, its outlook now anticipates real GDP to grow 1.6 percent in 2011, with gradual acceleration in the second half of 2012, reaching a 3.0 percent rate in the fourth quarter of 2012.
Lodging demand in 2011 is now expected to increase 4.8 percent, which combined with restrained supply growth of 0.7 percent, is expected to boost occupancy levels to 59.9 percent, the highest since 2007. Average daily rate (ADR) is expected to increase by 3.6 percent in 2011. In 2012, as the economic growth firms up, ADR growth is expected to accelerate to 5.2 percent, driving a RevPAR increase of 6.5 percent.
Pace of Bank Failures Picks Up Again
According to another Trepp LLC report, eleven banks failed in October, up sharply from six in September and seven in August. The count through October is now 85 failures year-to-date, putting the annualized pace just over 100 for the full year 2011.
The pace of closures in October was above the year-to-date average of 8.5 per month.
Commercial real estate exposure was the main driver behind problem loans for the banks that failed in October. Commercial real estate (CRE) loans comprised $401 million (65.1%) of the total $617 million in nonperforming loans at the failed banks.
Construction and land loans made up $254 million (41.2%) of the total, while commercial mortgages comprised $147 million (23.9%) of the total nonperforming pool.
The residential real estate loan category was a secondary source of distress, with $136 million in nonperforming loans, or 22.0% of the total nonperforming balance.
The failures mainly occurred in the Southeast and Midwest.
In the Southeast, there were three failures in Georgia and one each in Florida and North Carolina. Georgia and Florida rank first and second for failures, both in 2011 year-to-date and in the current cycle of failures that started in late 2007.
In the Midwest, there were two failures in Illinois and one each in Missouri and Minnesota. Illinois ranks third in the nation for failures, both in 2011 and in the current cycle. Minnesota ranks fifth (tied with Washington) for failures in the current cycle, but the pace of failures has dropped, with only two failures in 2011.
One failure occurred in the Northeast-First State Bank in New Jersey. Failures have been less prevalent in the Northeast, as the region avoided the worst excesses of the housing boom.
The largest failure occurred in the West-Community Banks of Colorado. It accounted for nearly 40% of total failed bank assets in October.
In addition, two more banks failed in the first week of November: SunFirst Bank in St. George, UT and Mid City Bank Inc. in Omaha, NE.
Posted by Scott R. Lodde