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Opinion Article Development

Relative Risk Premium: A New “Canary” for Hotel Mortgage-Market Distress

By: Jan A. deRoos Ph.D., Crocker Liu Ph.D., and Andrey Ukhov Ph.D.

Executive Summary: Lenders' evaluation of the hotel industry's prospects can be assessed using a metric called the relative risk premium, which we introduce in this report. Similar to the canary in a coal mine, changes in the relative rates that lenders charge for hotel loans, as compared to those for office buildings, give an early warning of relative hotel loan delinquencies.

Crocker LiuAndrey UkhovJan deRoos
By Crocker Liu, Andrey Ukhov, and Jan deRoos

Executive Summary: Lenders' evaluation of the hotel industry's prospects can be assessed using a metric called the relative risk premium, which we introduce in this report. Similar to the canary in a coal mine, changes in the relative rates that lenders charge for hotel loans, as compared to those for office buildings, give an early warning of relative hotel loan delinquencies. This metric is based on the practice of lenders charging higher interest rates for hotel loans than on office buildings.

The relative risk premium measure is defined as the interest rate on hotels minus interest rate on office buildings. Changes in this measure predict relative hotel loan delinquencies (delinquencies on hotel loans minus delinquencies on office building loans). Office loans are an appropriate benchmark to measure the relative health of hotel loans because office building occupancy has a relationship with the economy and with room-night demand. Spreads on hotel loans widen when lenders anticipate higher hotel delinquencies relative to offices and narrow during periods when relative delinquencies for hotels are expected to drop. We also find three other bellwethers for hotel delinquencies: an increase in the volatility of hotel REIT returns (risk), a negative shock to expected earnings forecasts (which signals lower expected future profitability), or an increase in unemployment. Interestingly, the converse situation doesn't hold, and an increase in relative delinquencies is not useful in predicting a rise in the relative risk premium.

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Crocker Liu
Crocker Liu
Robert A. Beck Professor of Hospitality Financial Management, Cornell

Crocker H. Liu is the Robert A. Beck Professor of Hospitality Financial Management and a professor of real estate at the Cornell’s Nolan School of Hotel Administration. He previously taught at New York University's Stern School of Business (1988-2006), where he was the associate director of real estate, and more recently at Arizona State University's W.P.

Andrey Ukhov
Andrey Ukhov
Assistant professor of finance in the Cornell School of Hotel Administration, Cornell

Andrey D. Ukhov is an assistant professor of finance in the School of Hotel Administration. Professor Ukhov is an expert on a wide range of investments, including preferred stocks, warrants, derivative securities, and convertibles.

Jan deRoos
Jan deRoos
Associate Professor and HVS Professor of Hotel Finance and Real Estate, CHR

Jan A. deRoos is an associate professor at the School of Hotel Administration, where he has taught since 1988. He has devoted his career to hospitality real estate; with a focus on the valuation, financing, development, and operation of lodging, timeshare, and restaurant assets. He holds BS, MS, and PhD degrees from Cornell University, all with majors in Hotel Administration.

CHR
School-University

The Cornell Institute for Hospitality Labor and Employment Relations was established in 2013 as a platform for students, employers, employees, unions, and their advocates involved in the hospitality industry. The institute's mission is to support educational programs, sponsor and disseminate research, and hold conferences and roundtables dedicated to modernizing labor and employment relations, analyzing labor and employment law, and improving...

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