After a three-year hiatus, hotel properties are starting to creep back into CMBS transactions. The CMBS market has seen three offerings backed solely by hotel properties so far this year, the latest of which was a $951.6 million floater via Deutsche Bank Securities that closed last week.

Principal Capital Real Estate CMBS Manager Marc Peterson said that before these deals emerged, he had not seen an all-hotel deal since 2000. In addition to the Deutsche transaction, Bear Stearns priced two similar fixed-rate offerings earlier this year.

Furthermore, hotels now make up between 3 and 5 percent of conduit transactions on average, the highest concentration of hotels the market has seen since 2001, Peterson said.

While hotels are beginning to surface more frequently, they are much more conservatively leveraged than they had been in previous years and represent a different class of property, Moody's Investors Service analyst Sally Gordon said. Investors have taken note of the change.

"We have [become] more comfortable with the underwriting; it reflects the past three years of performance since [Sept. 11], and deals are underwritten to a more appropriate level than those written prior to [Sept.11]," Peterson said.

However, investors are still wary of another possible major terrorist attack domestically. "By having that exposure, you are leveraged to another attack," Peterson said. "Hotels would be the most volatile property type in that situation. You hope that the loans are underwritten in such a fashion that they would hold up in the face of another attack."

Meanwhile, according to Moody's most recent Red-Yellow-Green report, a quarterly analysis of the anticipated performance of commercial real estate markets, U.S. hotels are on the rebound, with both the full-service and limited-service segments putting up strong growth in revenue per available room (RevPAR). On a scale of zero to 100, the segments received respective scores of 68 and 69. For the sector overall, RevPAR is up by 8.4% year-over-year. This marks the first time since March 2001 that the two segments have received a "green light", which indicates a score that falls between 67 and 100.

However, Moody's Gordon advised caution. "RevPAR has increased for the year, but the current RevPAR remains below the baseline in a lot of markets," Gordon said. "Some of these performance indicators look so strong because the whole sector is still digging itself out of a hole."

Nonetheless, Gordon is optimistic as demand for new hotel rooms is expected to outpace supply by 7.5% for the upcoming year. The overall improvement in the economy - and the corresponding uptick in both leisure and business travel - is just one of the factors driving demand. Other positive signs include negative supply, which was seen in 15, or almost one-third, of the full-service markets surveyed. Negative supply occurs when hotels are taken out of commission, or are converted to some other use, and there is actually less supply than in a previous period. Gordon called the phenomena "very unusual." The leading areas in this regard are Nashville, Tenn., Ft. Lauderdale, Fla. and Fort Worth, Texas.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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