Wednesday, October 7, 2009

Anemia in the Overnight Business: California Hotel Sector on Sick Leave

It's anyone's guess which real estate sector is delivering the worst performance in 2009: retail, industrial or hotel. (The consensus is that, at least in the Los Angeles area, the multifamily sector is outperforming the other three for the simple reason that population is stable and there is no substitute for a roof over one's head.)

Retail is suffering because of the dismal consumer outlays for purchases of all stripes. Industrial is cratering because of diminished economic output. And hotel is feeling the pain because business travelers and ordinary citizens are shunning overnight stays due to budget tightening at firms and family's 'staycations' and curtailed disposable income.

By many measures, the hotel industry in California is looking particularly anemic and heading for the sick bay.

More California hotels are being pushed into foreclosure as tourists and businesses alike scale back their travel plans and owners are unable to pay their mortgages.

Statewide, more than 300 hotels were in foreclosure or default on their loans as of Sept. 30 -- a nearly fivefold increase since the start of the year...

The list of troubled properties includes the St. Regis Monarch Beach in Dana Point, the downtown Los Angeles Marriott, the Sheraton Universal and the W hotel in San Diego.

Most struggling hotels remain open, but industry experts believe many properties are likely to be closed down in the months ahead, even if they are not in foreclosure, because they are losing so much money. The owners of the renowned Quail Lodge Resort and Golf Club in Carmel, for example, plan to close the hotel Nov. 16.

"I have never seen so many lenders contemplating mothballing properties," said Jim Butler, a hotel lawyer and chairman of the global hospitality group for Jeffer, Mangels, Butler & Marmaro. "It can and it will get worse for the hotel industry."

The problem is not unique to California, but the effect is being felt especially hard here because of tourism's importance to the state. [Los Angeles Times]
These are some chilling statistics that should send a frisson down the spine of any hotel owner, operator, loan servicer or lender. One in five hotels is expected to be in default by 2010.

How did we get into this mess? The origins are similar to those that contributed to the housing market bubble. Hotel asset prices escalated dramatically during the boom and many owners refinanced or took out equity when it seemed values could only go up. But hotel loan maturities are five or ten years, and notes made during the real estate heyday are coming due during the bust. Refinancing prospects for many of these properties look dim.

Buzzwords associated with the residential market -- upside down owners, foreclosures, lenders providing forbearance and loan modifications -- are now the lexicon of the hotel sector. But instead of displaced and distressed families we now have equity-starved national chains, down-in-the-dump REITs, and operators of major hotel establishments returning keys to loan servicers.

There is only one panacea to the challenging California hotel environment and that is time. Between now and the period of recovery (which may be several years off), there will be inevitable foreclosures, loan workouts, sales of distressed assets -- and yes, even some hotels scraping by by cutting costs and retooling their branding and business models. (One innovative idea is dropping 'Resort' from the hotel name so that expenses from these establishments can be approved by cost-conscious corporate managers.)

The Golden State, through all its booms and busts, never seems to lose its luster. Whether it concerns hotels by Lake Tahoe, Big Bear or Beverly Hills, travel will resume and hotels will again turn profits. But expect some changes afoot, with luxury hotels falling out of favor. Maybe an "Economy Shack" chain coming soon?