Fitch Calls for Conservative Credit Underwriting of Hotel Loans

The volume of hotel loans originated on the CMBS market will increase as the U.S. hotel market continues its recovery, predicts Fitch Ratings. However, while the quantity of loans is predicted to rise, quality could become a concern. Underwriting standards will largely determine how these hotel loans will weather future downturns, according to Fitch, which analyzes hotel loans based on real cash flow and current operations rather than focusing on growth projections.

Hotels do not have the same safety net from short-term market fluctuations that other traditional commercial properties do, according to David Harrison, director at Fitch Ratings. "Therefore, underwriting credit for improving fundamentals, without acknowledging the hotel sector's inherent volatility, could leave investors in CMBS more vulnerable to higher defaults from hotel loans."

According to Harrison, underwriting to future value "is akin to the aggressive underwriting witnessed in the late 1980s, which contributed to the commercial loan defaults of the early 1990s." But, he adds, "it’s not 2000 anymore, and hotel underwriting and sizing should reflect that reality."

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