What began as only a couple of us warning that the top was being reached, has now become a series of articles confirming that we are there. Hotels are already in a 10% value decline, and other property types are flat or about to be. As always it is all about the debt markets. Now that CMBS markets are grinding down to very limited capacity, and the Feds have put the squeeze on the banks to reduce leverage levels on commercial property loans, values have begun to flatten or decline as the returns due to lower or no leverage decline. It is always about the capital markets and currency markets. If debt is limited and more expensive, and if offshore investors can't buy things at a discount in their currency, then it is impossible to maintain high values.
Over the past two years there was a flood of Chinese and European money coming in. Equity and debt were readily available and loan leverage was too high at rates that were absurdly low. One again, lenders and investors were mispricing the risk. They learned nothing from the crash. Lenders though they were being careful but 70% of an inflated value is still a bad loan underwriting. It means the loan amount if inflated as well. Underwriting had begun to loosen too much and it resulted in property prices moving to a bubble level as the capital was readily available to pay and rates were artificially low so projected returns looked better than they will turn out to be.
As usual the hotel industry focused and still focuses on revpar which is a meaningless number. The hotel data reporters think revpar is all you need to know and they think things are great because it is up 5% or so every year over the past several years. They forget that revpar was down 40% in 2009 and so the reversal of the curve back up had to look great as the economy improved. It took until 2015 for inflation adjusted hotel values to simply get back to 2007 levels, and here we are in 2016 and they are already back down 10% according to Green Street and other reliable sources. Data sources in the hotel industry refuse to deal with reality because they only want things to look optimistic instead of realistic. Nobody ever reports NOI as they would see that in several markets it is still not back to 2007 levels on an inflation adjusted basis. They run around claiming demand is at an all time high but they ignore that the potential market has increased by 30 million people since 2007 due to population growth and foreign tourists so demand as a percent of potential market is not at a all time high. Hotel appraisers continue to turn out fantasies, and predictions of ever rising values even in the face of declining values. Why anyone ever pays for a hotel appraisal is beyond me. When we created the hotel CMBS business in 1993, we barred appraisal values form any decision on loan amount as we considered the appraisal values to be pure fantasy.
The party is over. My black swans have landed. Paris, Brussels, the holy war Muslims are waging against the western culture is now a full scale war on every continent. The US has had more terror attacks in this war than ever happened in WWII. We have a president who refuses to even acknowledge this is a world war against radical Islam, and the western Judeo Christian culture of equal rights and free speech is severely at risk. Europe will never be the same and is at major risk of losing its cultural identity due to the massive influx of Muslims from the middle east. As we see in France and Belgium, these people do not assimilate and they harbor terrorists. Merkel, supported by Obama has unleashed a major change in Europe which is already causing huge fiscal, cultural and crime problems. If you are an investor in Europe you need to wake up and look at what is happening and the long term impact on your investments.
The cycle has shifted and you need to pay attention. You should have been a seller last year and if you have a near term maturity from 2006-2007 vintage, you need to get your refi done now before it becomes even more problematic than it already is . With the CMBS market severely contracted already, it may be too late for you to get the debt refi you need. It is going to get worse as the year goes on.
What began as only a couple of us warning that the top was being reached, has now become a series of articles confirming that we are there. Hotels are already in a 10% value decline, and other property types are flat or about to be. As always it is all about the debt markets. Now that CMBS markets are grinding down to very limited capacity, and the Feds have put the squeeze on the banks to reduce leverage levels on commercial property loans, values have begun to flatten or decline as the returns due to lower or no leverage decline. It is always about the capital markets and currency markets. If debt is limited and more expensive, and if offshore investors can't buy things at a discount in their currency, then it is impossible to maintain high values.
Over the past two years there was a flood of Chinese and European money coming in. Equity and debt were readily available and loan leverage was too high at rates that were absurdly low. One again, lenders and investors were mispricing the risk. They learned nothing from the crash. Lenders though they were being careful but 70% of an inflated value is still a bad loan underwriting. It means the loan amount if inflated as well. Underwriting had begun to loosen too much and it resulted in property prices moving to a bubble level as the capital was readily available to pay and rates were artificially low so projected returns looked better than they will turn out to be.
As usual the hotel industry focused and still focuses on revpar which is a meaningless number. The hotel data reporters think revpar is all you need to know and they think things are great because it is up 5% or so every year over the past several years. They forget that revpar was down 40% in 2009 and so the reversal of the curve back up had to look great as the economy improved. It took until 2015 for inflation adjusted hotel values to simply get back to 2007 levels, and here we are in 2016 and they are already back down 10% according to Green Street and other reliable sources. Data sources in the hotel industry refuse to deal with reality because they only want things to look optimistic instead of realistic. Nobody ever reports NOI as they would see that in several markets it is still not back to 2007 levels on an inflation adjusted basis. They run around claiming demand is at an all time high but they ignore that the potential market has increased by 30 million people since 2007 due to population growth and foreign tourists so demand as a percent of potential market is not at a all time high. Hotel appraisers continue to turn out fantasies, and predictions of ever rising values even in the face of declining values. Why anyone ever pays for a hotel appraisal is beyond me. When we created the hotel CMBS business in 1993, we barred appraisal values form any decision on loan amount as we considered the appraisal values to be pure fantasy.
The party is over. My black swans have landed. Paris, Brussels, the holy war Muslims are waging against the western culture is now a full scale war on every continent. The US has had more terror attacks in this war than ever happened in WWII. We have a president who refuses to even acknowledge this is a world war against radical Islam, and the western Judeo Christian culture of equal rights and free speech is severely at risk. Europe will never be the same and is at major risk of losing its cultural identity due to the massive influx of Muslims from the middle east. As we see in France and Belgium, these people do not assimilate and they harbor terrorists. Merkel, supported by Obama has unleashed a major change in Europe which is already causing huge fiscal, cultural and crime problems. If you are an investor in Europe you need to wake up and look at what is happening and the long term impact on your investments.
The cycle has shifted and you need to pay attention. You should have been a seller last year and if you have a near term maturity from 2006-2007 vintage, you need to get your refi done now before it becomes even more problematic than it already is . With the CMBS market severely contracted already, it may be too late for you to get the debt refi you need. It is going to get worse as the year goes on.
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Joel Ross
Joel Ross began his career in Wall St as an investment banker in 1965, handling corporate advisory matters for a variety of clients. During the seventies he was CEO of North American operations for a UK based conglomerate, and sat on the parent company board. In 1981, he began his own firm handling leveraged buyouts, investment banking and real estate financing. In 1984 Ross began providing investment banking services and arranging financing for real estate transactions with his own firm, Ross Properties, Inc. In 1993 Ross and a partner, Lexington Mortgage, created the first Wall St hotel CMBS program in conjunction with Nomura. They went on to develop a similar CMBS program for another major Wall St investment bank and for five leading hotel companies. Lexington, in partnership with Mr. Ross established a hotel mortgage bank table funded by an investment bank, and making all CMBS hotel loans on their behalf. In 1999 he formed Citadel Realty Advisors as a successor to Ross Properties Corp., focusing on real estate investment banking in the US, UK and Paris. He has closed over $3.0 billion of financings for office, hotel, retail, land and multifamily projects. Ross is also a founder of Market Street Investors, a brownfield land development company, and has been involved in the acquisition of notes on defaulted loans and various REO assets in conjunction with several major investors. Ross was an adjunct professor in the graduate program at the NYU Hotel School. He is a member of Urban Land Institute and was a member of the leadership of his ULI council. In 1999, he conceived and co-authored with PricewaterhouseCoopers, the Hotel Mortgage Performance Report, a major study of hotel mortgage default rates.
