Cornell Study Highlights Drivers of Hotel Risk Premium
A new report from the Center for Hospitality Research (CHR) highlights the factors that drive the interest-rate spread between loans for hotels and office buildings. That interest-rate spread, in which hotel loans become more or less expensive than loans for office buildings, is a predictor of the relative delinquency of the hotel loans. The factors that cause those interest rate differentials are important, because they help forecast the fate of the hotel finance market. The report, "Looking Under the Hood: The Catalysts of Hotel Credit Spreads," by Jan A. deRoos, Crocker H. Liu, and Andrey D. Ukhov, is available at no charge from the CHR.
Using a statistical framework known as vector autoregression (VAR), the researchers analyze the catalysts that drive that credit spread (which is also known as risk premium differential). "Lenders require hotel owners to pay a higher interest rate than other real estate, because hotels are viewed as a more risky investment," said deRoos, the HVS Professor of Hotel Finance and Real Estate and an associate professor at the Cornell University School of Hotel Administration (SHA). "Our analysis captures the elements that contribute to that risk."
"We found that hotel credit spreads against office building loans widen when the general economy worsens, anticipated corporate profitability declines, capital availability decreases, or when hotel revenues decrease," added Ukhov, who is an assistant professor at the SHA. "These factors have different weights over time, but when any of these factors decline, we liken this to when the canary in the coal mine stops singing—there's trouble ahead."
"We used the VAR analysis because this allows us to analyze all these factors simultaneously and capture their interaction as they affect the risk premium differential," said Liu, who is the Robert A. Beck Professor of Hospitality Financial Management at the SHA. "The variables that are statistically significant in our analysis capture risk and return information embedded in the risk premium differential."
In an earlier study, the three researchers established the connection between hotel loan delinquency and the hotel risk premium, as compared to office building loans. That study, "Relative Risk Premium: A New "Canary" for Hotel Mortgage-Market Distress," is also available at no charge from the CHR.
About the Center for Hospitality Research
The purpose of the Center for Hospitality Research is to enable and conduct research of significance to the global hospitality and related service industries. CHR also works to improve the connections between academe and industry, continuing the School of Hotel Administration's long-standing tradition of service to the hospitality industry. Founded in 1992, CHR remains the industry's foremost creator and distributor of timely research, all of which is posted at no charge for all to use. In addition to its industry advisory board, CHR convenes several industry roundtables each year for the purpose of identifying new issues affecting the hospitality industry.
Center Members: Accenture • Access Point Financial, Inc. • Barclaycard US • Cvent • Davis & Gilbert LLP • Deloitte & Touche USA LLP • DerbySoft • Four Seasons Hotels and Resorts • Fox Rothschild LLP • Hilton Worldwide • Host Hotels & Resorts • Hyatt Hotels Corporation • IDeaS Revenue Solutions • InterContinental Hotels Group • Jumeirah Group • Marriott International • NTT DATA • Preferred Hotels & Resorts • priceline.com • PwC • The Rainmaker Group • RateGain • ReviewPro • Revinate • Sabre Hospitality Solutions • STR • Taj Hotels Resorts and Palaces • Tata Consultancy Services • Wipro EcoEnergy • Wyndham Hotel Group
