Are you wondering where rates are going and if now is the right time to secure financing? JLL’s hotel financing experts give you an insider’s perspective on the lending market.
Fixed-Rate: With the rise of Treasury rates, it is prime time for long-term holders of stabilized hotel assets to secure fixed rate financing and lock in today’s rates, which remain relatively low, historically.
For borrowers who own or are acquiring stabilized assets, now is the right time to secure a fixed rate loan in either the CMBS market or, for certain assets, with a life insurance company. As the Fed withdraws monetary stimulus and the economy continues to improve, we believe Treasury rates will likely continue to rise. Loan coupons are up by over 100 basis points (bps) since early May due to a rise in Treasury rates and credit spreads have not compressed enough to absorb the increase.
Improving economic fundamentals and an incremental increase in systemic leverage could drive credit spreads tighter, partially offsetting a rise in Treasury rates. 5- and 10-year spreads are still significantly higher, by well over 100 bps, than they were in 2006 when the capital markets were at their most frothy. Although we do not expect a return to those levels anytime soon, there is meaningful room for spreads to compress as the economy improves and as greater liquidity returns to the capital markets.
Floating-Rate: Short-term, floating-rate financing options will be an attractive vehicle for hotel owners, as the LIBOR risk remains relatively low during the next few years. Increased competition for lending is causing credit spreads to tighten, pushing lenders to finance more non-stabilized assets.
Over the past year, borrowers frequently saw floating rate loan coupons that were approximately 100-150 bps higher than fixed rate CMBS loan coupons due to lower Treasury rates (which fixed rate deals are quoted to) and a dearth of floating rate lenders. However, generic floating rate loan coupons are now equal to or lower than fixed rate loan coupons, which is the result of two factors.
First, over the past several months the LIBOR rate has remained stable at 0.18%-0.20%, while Treasury rates have risen. This is because the LIBOR rate generally tracks changes in the Federal Funds rate, which has been between 0.0% and 0.25% since December of 2008. During this period (December 17, 2008 to September 2, 2013), the LIBOR rate has averaged 0.26%. Market expectations are that the Fed will maintain the current Federal Funds rate through 2015, which means that the LIBOR rate will likely remain low for the foreseeable future.
Second, floating rate credit spreads have been reduced as more lenders have entered the market and competition for loans has increased. This spread compression has also had the added benefit of pushing lenders deeper in the capital stack and to finance more transitional assets. Similar to fixed rate loans, floating rate credit spreads are still high compared to the peak of the last cycle when 80 percent hotel loans with pro forma underwriting were being done at a spread of 150bps. As such, there is considerable room for spread compression in the future.
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Jones Lang LaSalle (NYSE:JLL) is a professional services and investment management firm offering specialized real estate services to clients seeking increased value by owning, occupying and investing in real estate. With annual revenue of $3.9 billion, Jones Lang LaSalle operates in 70 countries from more than 1,000 locations worldwide. On behalf of its clients, the firm provides management and real estate outsourcing services to a property portfolio of 2.6 billion square feet and completed $63 billion in sales, acquisitions and finance transactions in 2012. Its investment management business, LaSalle Investment Management, has $46.3 billion of real estate assets under management. For further information, visit www.jll.com.
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