Magazine article American Banker

As Hotels Rise, So Do Banks' Lending Options

Magazine article American Banker

As Hotels Rise, So Do Banks' Lending Options

Article excerpt

If they build it, guests will come. Or so hotel developers and their bankers hope.

While occupancy rates at the nation's hotels have inched downward in recent years, construction has been on the rise, according to data from Coopers & Lybrand and Smith Travel Research.

One reason for the paradox, experts say, is the ready availability of financing for hotel construction.

"There is money available for almost any deal," said Bjorn Hanson, chairman of the hospitality industry group at Coopers & Lybrand. "It's so different than it was two years ago." The building boom "is not caused by the bankers, but they are willing participants."

In 1997 occupancy rates dipped from 65.1%, to 64.5%-slightly less than the average of 64.97% logged during 1975 to 1996. In 1998, the rate is expected to drop to 63.57% and in 1999 to 62.8%.

At the same time, construction of hotel rooms rose to 142,810 in 1997- the highest level since 1986. Although room starts are not expected to be as high in the next two years, with 137,667 rooms projected in 1998 and 111,609 rooms in 1999, the numbers are reminding some market participants of the go-go days of the 1980s.

The financing packages backing much of the construction today resemble those that nearly toppled the industry a decade ago, some experts say.

"When I see the agreements, it reminds me of 1985," Mr. Hanson said. "Leverage ratios are higher than they have been," with developers borrowing anywhere from 70% to 75% of a property's value. That is not quite as high as the 80% ratios seen at the height of the 1980s, but they are significantly higher than they have been in recent years.

Mr. Hanson pointed out, however, that property appraisal methods have improved significantly since the 1980s, making lending safer.

The hotel industry is raking in record profits. In 1997 the hotel industry logged $14. …

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