Manhattan’s hotel oversupply threatens $731M in CMBS loans: Morningstar

Research firm predicts declines in revenue per available room, as well as increased default risk

Manhattan Hotel occupancy versus new supply, historical and projected (credit: Morningstar Credit Ratings)
Manhattan Hotel occupancy versus new supply, historical and projected (credit: Morningstar Credit Ratings)

Manhattan hotel developers have overbuilt, and incomes at new and existing hotels are unlikely to hit industry projections, according to a new report from research firm Morningstar Credit Ratings.

That could mean trouble ahead for some CMBS investors, as loans worth about $731 million, roughly a fifth of the $3.68 billion Manhattan hotel-backed CMBS market, see elevated default risk over the next two years, researchers found.

Loans backed by properties such as the Flatiron Hotel at 9 West 26th Street, the Hampton Inn South Street at 320 Pearl Street in the Financial District and the MAve Hotel at 62 Madison Avenue in Nomad are among the most threatened, according to Morningstar’s projections.

Builders have created nearly 19,000 new hotel rooms in the city over since 2009, with another 10,000 set to come online in 2016 and 2017, according to the report, written by Brian Snow, Cara Costich and Edward Dittmer.

The boom, researchers said, was fueled by a steep increase in tourism, rising property values and the availability of plentiful financing, often from abroad, including through the EB-5 visa program.

Demand has so far kept pace, but that’s set to change, according to the report.

Occupancy rates over the next two years will fall steeply, to 80.5 percent, down from 86.4 percent in 2015, according to Morningstar. Revenue per available room (RevPAR), one of the hotel industry’s key metrics, will fall about 11 percent by 2017, to $221.45 from $248.51.

“One would expect to see some kind of slowdown,” said Dittmer, a Morningstar vice president who analyzes the CMBS market. “But I think 11 percent is a significant number.”

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Multiple industry insiders who spoke to The Real Deal, however, predict a much milder slowdown.

Their assessment was echoed in HVS Global Hospitality’s Q1 2016 Manhattan Lodging Overview, which predicted 85.6 percent and 85.2 percent occupancy in 2016 and 2017 respectively, with RevPar dropping just a few dollars to $245 per night.

Morningstar’s researchers identified 14 New York properties that would likely have trouble covering loan payments under the circumstances predicted.

The list also included the Hotel Gansevoort, the Mansfield Hotel, the Residence Inn Times Square, the Gansevoort Park Avenue, Sixty LES, Courtyard by Marriott Times Square South, the Hotel Giraffe and the Courtyard Marriott Fifth Avenue.

None of these properties would necessarily default, Dittmer said.

“The X-factor is the ability of the borrower to cover the loan payments out of their own pocket, how willing that individual is to fund those loses.”

Meanwhile, Manhattan’s hotel investment sales market steamed along with the $150 million purchase of the Holiday Inn Midtown at 440 West 57th Street by Los Angeles-based Woodridge Capital Partners this week.

The supply glut has caused the New York City hotel market to crash back down to earth in the last year. An analysis by The Real Deal in April found that hoteliers submitted permit applications for only six new hospitality properties with at least 10 units — a total of 512 units — across the city in the first three months of 2016.