Plunging vacancy rates are prompting some New York City hoteliers to seek multiple refinancings and use the money to upgrade existing properties or buy more real estate.
“Over the past 24 months, hotel refinancing has really been a nationwide trend,” Mark Gordon, head of the international lodging group at Sonnenblick-Goldman, said. “But it is much more pronounced in New York.”
Although no accurate overall numbers are available, the numbers from Gordon’s group alone are impressive. His group, which arranges financing for hotel owners, has done more than $2 billion worth of hotel financing in New York over the past 24 months. They are now in the market for an additional $1 billion in the refinancing of New York hotel properties and are getting strong interest from lenders, he said.
One hotel owner, whom Gordon declined to name, refinanced a hotel three times in 13 months, while another refinanced in March and then again in November, he said.
The wave of borrowing is driven in part by eager lenders, who have found a hot market for securitized loans — basically offering portions of the loans as bonds to investors looking to get a piece of the real estate industry in any way they can. The competition among lenders has driven down interest rates, and has led to other favorable loan terms and borrowing incentives.
“Two years ago, hotels were not viewed that favorably by bond pools,” said Mitch Adelstein, president of CRG Realty Capital. “They didn’t want to see hotels as more than 5 percent of a loan package. They are now accepting 15 to 20 percent or upwards of hotel loans in bond packages.”
The active market for hotel financing comes at a time of record demand for hotel rooms. Some 44 million tourists visited the city last year, up from 41 million the previous year, competing for a mere 72,150 rooms. Many Manhattan hotels were operating at capacity some months, sending visitors into the outer boroughs and driving up room rates. The rising average daily rate and revenue-per-room numbers were up more than 10 percent last year. That’s led to increased cash flow, which has also helped create more favorable loan terms when hoteliers sought cash for renovations and acquisitions.
“Each time, the client pulled out additional proceeds at dramatically reduced financing,” Gordon said. That money is then free to “improve the hotel, buy other [real estate] assets, buy an airplane — or all of the above,” Gordon said.
The eye-popping numbers of some recent deals give a glimpse of the impact of this capital on the overall market. In February, a Dubai-based investment group purchased a 73 percent stake in the Mandarin Oriental Hotel in the Time Warner Center for about $1.37 million a room, a record price for New York and the United States. “Many hotels have doubled in value over the last 24 months, and there are good reasons for that,” Gordon said.
Still, some industry observers say hotels are not overvalued.
“Relative to other asset classes — office, industrial and retail — I don’t think hotels are overvalued. I would say they are underpriced,” Adelstein said. “The two things fueling the values of hotels are the underlying fundamentals — you’ve had double-digit increases in the revenue per room — and the other factor is the capital markets.”
Analysts, brokers and developers say the underlying fundamentals are likely to remain strong in the months ahead. Even with some 13,000 hotel rooms in the pipeline in New York City through 2010, demand has been so strong that many believe the city may continue to operate near capacity.
John Fox, vice president of PKF Consulting, said he expects average daily room rates will continue to go up at two times the rate of inflation.
“In 2007, we think rates will go up double if not triple inflation at 6 to 7 percent,” Fox said.
Still, lenders are more conservative than in the past. Fox notes that since the savings and loan scandals of the early 1990s, banks are unwilling to finance at 100 percent of a property’s value. Most loans today are 65 percent to 70 percent of the value of the collateral, he said.
“The loan-to-value numbers provide a pretty healthy cushion, so even if values drop some, which I don’t expect, there’s still a cushion — so they aren’t over leveraged,” he said.
“Look, [values] are high — they’re at record high levels,” he added. “But so are earnings. So long as we see the very strong markets we’ve seen, we’re going to continue to see a booming market.
Fox said he doesn’t foresee a downturn.
“If anything, there will be more of a leveling. We may be at more of a peak,” he said. “It could plateau. Occupancies have softened very, very slightly. But room rates continue to go up at two times the rate of inflation. While we will have some depressions, even at bottom it would be 80 percent capacity in New York, which is still very, very healthy. Most markets would kill to have 80 percent.”
Construction costs are so high some developers are not willing to build new hotels. But demand continues to outpace new construction, lifting prices for hotel rooms.
“Hotel values continue to increase, interest continues to increase, and the cost to build hotels continues to increase,” Gordon said. “It’s really the perfect environment for hotels.”v