Do CMBS Hotel Loan Delinquency Rates Accurately Reflect US Hotel Performance?

During the Great Recession, CMBS hotel loan delinquency rates were a trailing indicator of US hotel performance according to CMBS loan data provided by Trepp and US hotel performance metrics from STR, Inc. (STR is the leading global provider of competitive benchmarking, information services and research to the hotel industry.) Can any trends be gleaned from recent CMBS loan delinquency and US hotel performance data to serve as a basis for projecting into 2016 and beyond? Or are other sources of information needed to provide a clearer glimpse into the future?

2009 Ex 1

The answer to whether more sources of information is needed to project into the future is a resounding yes, as will be made clear later in this article in addition to the summary of 2015 and outlook for 2016 that follows.

The November 2015 edition of PwC Hospitality Directions US summarizes the state of the US lodging market in 2015: “Average Daily Rate (ADR) growth continues to look for a firm footing, despite peak occupancy levels.”

PwC then went on to reach the final conclusion for their full year 2015 outlook as well as projections for 2016.

2015 Outlook

• “Softer than expected ADR growth in Q3 driving Revenue Per Available Room (RevPAR) increase of 6.5% for the year.

• Occupancy’s contribution to RevPAR growth more meaningful than previously expected for some segments.

US hotel occupancy expected to reach 65.6%, the highest level

since 1991.”

2016 Outlook

• “Supply growth reaching long-term average of 1.9%.

• As occupancy levels stabilize (at or near peak levels), ADR

growth drives RevPAR increase of 5.7%.”

In 2009 the hotel industry experienced the largest year over year decline in RevPAR with a decline of -16.6%. May 2009 was the month with the greatest year over year decline with a drop over the prior year of -20.4%.

2009 opened with a CMBS hotel loan delinquency rate of 1.72% in January, but it accelerated rapidly and rose to a peak of 19.3% in September 2010 — 16 months following the largest monthly year over year decline in RevPAR. However, it took only six months for the CMBS hotel loan delinquency rate to hit double digits after the largest RevPAR decline.

By contrast, the recovery in hotel performance was a lengthy one. It took until 2013 — six years — for full year RevPAR to surpass the pre-recession peak of $65.54 in 2007.

For hotel loan delinquency rates, five years is the time it took — from September 2010 to September 2015 — for the peak to trough cycle to run from the CMBS hotel loan delinquency rate high to the most recent low of 2.9% reached in September 2015. While it took only months for the acceleration in hotel performance metrics to decline so rapidly, it took five to six years for the recovery to occur.

Could the same occur again, or are all cycles different?

2009 Ex. 2

STR, Inc. US Hotel Performance

In order to better understand how the decline in hotel performance occurred during the recession, data was reviewed from 2008-2015 for the categories of RevPAR, Supply & Demand, Occupancy and Revenue. Some clear trends emerged.

The decline in occupancy led hotels into the recession and was the first performance metric to improve after the trough was reached in May 2009. Annual occupancy increased during 2010 while the ADR suffered a decline during the same year. Hotel operators maybe have been pushing down rate in order to bolster occupancy.

RevPAR had a period of 19 consecutive months of year over year declines starting in August 2008. During the same period it dropped by almost  30%. Supply increased by almost 3% during calendar 2009 with a near 2% increase during 2010. Since 2011 however, supply nationally has largely remained in check with less than 1% of inventory added each year. There are and will always be regional variances to this as new supply in New York in 2015 and 2016 for instance is far above the national level. The only annual revenue decline during the whole cycle occurred during 2008 with a decrease of -14.3%. This was the first annual decline in revenue since the effects of 9/11 disrupted the US travel market during 2001. Annual revenue has since rebounded strongly within a range of almost 6%-9%.


• 2009 had largest year over year decline in RevPAR of -16.6%

• Each month during 2009 except December experienced double digit decline year over year

• May 2009 had greatest monthly RevPAR decline over prior year of 20.4%

• 19 consecutive months of YOY RevPAR declines running from August 2008–February 2010

• Over same 19 month period, RevPAR peaked at $72.18 in August 2008 and troughed at $51.13 in February 2010 — a drop of $21.05 or almost 30%

• Full year RevPAR peaked at $65.54 in 2007 and troughed at $56.45 in 2010 — a peak to trough drop of $9.09 or 14%

• It took 6 years for full year RevPAR to pass pre-recession peak. $65.54 in 2007 — $68.47 in 2013

Supply & Demand

• Largest annual increase in supply occurred during 2009 at 2.8% with approximately 48,000 new rooms added to inventory

• Additional 1.7% increase in supply during 2010 but then annual increases below 1% for the years from 2011–2015

• First annual decline in demand since 2001 (events of 9/11) occurred during 2008 with -2.5% followed by drop of -6.2% during 2009

• Demand bounced back quickly with 7.3% increase during calendar year 2010

• Positive increases in demand each year from 2011–2015 within range of 2%–4.7%


• First annual decline in occupancy during cycle occurred during 2007 at -0.5%

• Largest annual decline in occupancy came during 2009 of -8.8%

• 3 straight years of annual occupancy declines from 2007–2009

• Occupancy drove initial recovery during calendar 2010 with an increase of 5.6% while ADR suffered a decline of -0.1% during the same year


• Flat revenue growth during 2007 of 0.3%

• Only revenue decline during the cycle occurred during 2008 with dramatic decrease of -14.3%

• 2008 represented first year of annual revenue decline since 2001 which was -0.45% but was largely driven by events of 9/11

• Annual revenue has increased from 2011–2015 within a range of 5.8%–9.0%

Trepp CMBS Hotel Loan Delinquency

Prior to 2009, the CMBS hotel loan delinquency rate was consistently below 1% and opened 2009 at 1.72%. The rapid decline in hotel performance during the year resulted in a year end delinquency rate of almost 14% — by far the greatest annual increase in loan delinquency in the recent past. While it took only 11 months for the hotel delinquency rate to rise from (rounded) 2% to 14%; 80 months after the delinquency rate first hit 14%, the delinquency rate at 2.9% is still not down to the pre-recession level of 2% or below.

• 2009 started with delinquency rate of 1.72% in January

• Spiked to 8.65% in October and ended the year at 13.86% in December

• Peak CMBS delinquency rate of 19.33% reached in September 2010 — 19 months after the largest monthly RevPAR decline which occurred in May 2009

• Leading into a recession, CMBS delinquency rate clearly a lagging indicator of hotel performance

• Double digit delinquency rate for 39 consecutive months from November 2009–January 2013

• Final month of double digit lodging CMBS delinquency rate occurred in March 2013

• Delinquency rate low of 2.9% reached in September 2015

• Delinquency rate below 5% consecutively each month since July 2014

Is There A Link Between US Hotel Performance and CMBS

Hotel Loan Delinquency Rates?

Due to the lead time associated with the development and construction of hotel properties, there was an increase in the supply of new hotel rooms in the US during 2009 and 2010 at the exact time of the worst conditions for hotels during the recession. The impact of new supply at this time was a contributing factor to increased loan delinquency rates.

Perhaps the strongest parallel to be drawn between US hotel performance

and the CMBS hotel loan delinquency rate is the lag time after a drop in hotel performance before loan delinquency rates increase. During May 2009, which was the worst month for US hotel performance during the recession, the CMBS hotel loan delinquency rate was at a very low 3.16% — almost the same as the September 2015 rate of 2.9%. While the delinquency rates are similar, the market characteristics between those two dates could not be more different. It took six months after May 2009 for the CMBS loan hotel delinquency rate to hit double digits and 16 months (September 2010) until the delinquency rate hit its recessionary peak at 19.3% — when one in five CMBS hotel loans were in some form of default.

One reason for the lag time until delinquencies increase is the access to equity and capital that hotel owners have to support their properties, but perhaps the greater reason is that hotel loans have the greatest level of reserves of any property type within CMBS. Some hotels even have seasonality reserves so that during lean times, the property is ready to support debt service when the property is operating at its lowest level of the year. Other reserves, such as Furniture, Fixture and Equipment (FF&E) can provide a cushion that during adverse economic conditions may be used to help support debt service.

The CMBS hotel loan delinquency rate has been in single digits for thirty consecutive months starting in April 2013 — at the same time that US hotel performance has been experiencing consistent improvement. While the US hotel market is in a period of sustained improvement, the CMBS hotel delinquency rate has likewise been in a long and steady period of improvement and now stability. In good times, there is clearly a link between the two sets of data. It is when the economy either improves or declines in a dramatic or quick timeframe that the parallels between the data are harder to discern.

Given that hotels can — or are forced to — set their rates to market on a daily basis, it is reasonable to see that their performance would  deteriorate the fastest during a downturn since they do not have the benefit of long term leases such as CRE and multifamily properties. By contrast, hotels can mark their rates UP to market the quickest of any property type in an improving economy, so as a property group they were the quickest to improve while property types such as retail continue to lag even during 2015. CMBS loan delinquency rates took far longer to recover largely because foreclosures and the sale of REO, loan workouts and modifications all take much longer to complete and so make it easier to understand why the delinquency rate was in double digits for thirty nine consecutive months.

What Does Historical Hotel Data Tell About How To Predict Future Events?

If the trends from the last recession hold true during the next downturn, it will take between six to sixteen months for CMBS loan delinquency rates to hit elevated and peak levels after the worst of hotel performance in relation to ADR, RevPAR and Occupancy.

Even if September 2015 is the latest peak in US Hotel performance during this cycle, the peak CMBS loan delinquency rate would not be reached until well into 2017. This is purely conjecture however, and it is clear that outside sources are needed in order to better make projections of what market conditions hold for hotels and loan delinquency rates into 2016 and beyond.

Warning Signs?

There are two performance measures provided by STR, Inc. that give at least some pause during a long period of improved metrics. Does August 2015 represent the start of a decline in US hotel performance, or is it simply an outlier that is not part of a trend?

• Demand – August 2015 represents first monthly decline in YOY Demand (-0.3%) since November 2009 – 69 consecutive months without a decline

• Occupancy – August 2015 represents first monthly decline in YOY Occupancy (-1.4%) since January 2010 – 67 consecutive months without a decline September 2015 performance metrics were improved across all major categories and so more time is needed to determine if August 2015 is indeed a one-time aberration or the start of a cyclical decline in US hotel operations.

What Do Other Data Sources Reveal About Hotel Performance During 2016 & Beyond?

STR, Inc. and PwC both provide outlooks for a variety of hotel metrics projecting through the end of 2015 and into 2016. They are both in agreement that RevPAR growth will continue for the foreseeable future. PwC projects that the 2015 RevPAR increase will conclude at 6.5% and STR, Inc. at 6.6% while PwC projects the 2016 full year increase to be 5.7% with the STR, Inc. projection at 5.6%. Both of these are lower than previous projections, suggesting a recent moderation in US hotel performance.

What Comes Next?

Will the CMBS hotel delinquency rate rise significantly during 2016? Unlikely. Has US hotel performance peaked during this cycle? Again — unlikely given the projections for RevPAR growth during 2016. However, there are reasons to be cautious. PwC projects that occupancy levels have reached a peak across the US — at 65.6% — the highest level since 1981. There are areas such as the New York Metro where supply, including new construction, is exceeding current levels of demand.

CMBS lenders will need to be mindful when underwriting new loans using occupancy levels that appear to be at a high for the current cycle. For new loans, the higher the level of reserves, the greater likelihood the property will be able to sustain itself during a downturn in economic conditions or property performance.

Lenders should also generally avoid interest-only loan structures and implement basic conservative hotel principles when sizing loan proceeds, especially at or near the top of the market.

The recent announcement that Marriott International will acquire Starwood Hotels & Resorts Worldwide, creating the world’s largest hotel company is a sign of consolidation of the major players within the US. Expect this to continue. Just as it has occurred in the airline industry, this could lead to further acquisition activity in the industry. A transaction of this magnitude simply could not have happened during a recession and is undoubtedly a sign of confidence in the US hotel market by one of its biggest players.

209 Ex. 3