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Cornell introduces new metric for distress

A study from The Center for Hospitality Research (CHR) at Cornell University proposes a new metric that could provide an early warning of distress in the hotel mortgage market. The relative risk premium has been dubbed the new “canary in the coal mine” and is based on the changes in loan rates charged on hotel loans compared to loans for office buildings. 

“We found that this relative risk premium predicts changes in the number of hotel loan delinquencies in relation to office loan delinquencies,” said the study’s co-author Audrey Ukhov. “Lenders almost always charge more for hotel loans, because they are viewed as inherently more risky than loans for office buildings. But when that rate spread increases, we can expect a greater challenge for hotel loans.”

The analysis found that office loans are an appropriate benchmark to measure the health of hotel loans because office occupancy has a relationship with the economy and room night demand as business travelers make up a major portion of the hotel industry.

Researchers also found three additional predictors of hotel mortgage market distress: an increase in the volatility of hotel REIT returns, a negative shock to expected earnings forecasts and an increase in unemployment.

The full report is available at CHR’s website.

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