Headlines – Week of March 21, 2010
March 26, 2010
Is the Hotel Industry Set for a Recovery?
PKF Hospitality Research recently announced that U.S. hotels should enjoy double-digit revenue growth by 2012. The information was published in the March 2010 edition of Hotel Horizons®.
PKF-HR is forecasting hotel room revenue to grow 10.5% on a per-available-room basis (RevPAR) in 2012. The strong growth in RevPAR is driven by Moody’s Economy.com’s forecasts for income and employment. In 2012, Moody’s is projecting income to grow at a 4.4%, a rate not seen since 2006. In addition, their 3.2% forecast for employment growth in 2012 is an all-time high since 1988.
Until 2012, however, market conditions will remain relatively soft. For 2010, PKF-HR is forecasting a 1.1% decline in RevPAR, the third consecutive year of falling RevPAR for the U.S. lodging industry.
Despite the decline in RevPAR this year, they predict lodging market conditions will turn and improve throughout the year as demand for hotel rooms has been greater during the first quarter of 2010 than it was during the same period the prior year. This growth in demand is expected to persist throughout the year and result in an annual increase in rooms occupied of 1.5%.
Smith Travel Research (STR) is forecast room supply to grow only 1.2% in 2010, down from the 3.2% net increase in new rooms that were opened in 2009. With demand rising at a 1.5%, the average occupancy rate for the U.S. lodging industry is expected to increase 0.3% to 55.2% in 2010.
According to PKF-HR, rate discounting will continue in 2010 with national occupancy levels are below the 60% level. The company does not believe that quarterly ADR will exceed 2009 levels until the third quarter of 2010. They forecast ADR will increase 3.4% in 2011 after declining 1.4% in 2010.
Deloitte Reports Commercial U.S. Real Estate Potentially Hits Bottom in 2010
According to Deloitte’s Perspectives on Real Estate: Uncovering Opportunity in a Distressed Market, while declining values, debt maturity and tight credit access, and stalled construction may continue to plague commercial real estate in the United States for the remainder of 2010, economic indicators point towards the potential for economic recovery this year. For investors, this environment reveals a window of opportunity in 2010 when investment in distressed assets may prove to be opportune.
According to the report, the challenges that affected owners and operators in 2009 will extend over the next nine to 18 months. They include:
1. Declining real estate values – U.S. commercial real estate values have decreased significantly; according to some reports, up to 40% across all property types since their peak in 2007. Declining values are driven by job losses and declining consumer spending. As a result, vacancies are up and rents are down which lead to decreasing values, especially in office and retail assets. In Midtown Manhattan, for example, brokerage CB Richard Ellis Group Inc. reports that the amount of available office space has increased by 16 million square feet since the beginning of 2008; building owners subsequently have dropped their asking rental rates by more than 30% since November of that year.
2. Debt maturity and credit access – Organizations which took out large loans to purchase property during the market’s boom did so assuming that rents and occupancy rates would continue to rise; instead, both have fallen dramatically. Declining real estate values exacerbate the ability of property owners and investors to find or refinance debt. According to Deutsche Bank, more than $1.4 trillion in commercial mortgages will come due by 2013, and as much as 65% of these will have difficulty getting refinanced. Although capital markets for credit and debt have opened to some extent, the situation is different than before since lenders are allowing less leverage on new loans. Also, debt is more expensive, in part, because lenders are only willing to lend at a lower loan-to-value rate. Finally, the commercial mortgage-backed securities (CMBS) market, a huge source for real estate debt capital in the past decade, has virtually disappeared, severely affecting the supply of debt capital. Owners and mortgage holders will likely continue to struggle with debt maturity in 2010 and beyond, with an expected increase in foreclosures and deeds in lieu. Opportunistic investors, many who raised significant capital for this purpose, are using foreclosed properties and distressed debt as a strategic opportunity to make opportunistic acquisitions and expand their real estate portfolio.
3. Stalled construction – There will likely be almost no new construction activity in any asset class in 2010, (evidenced by the glut of office space in Midtown Manhattan and other major markets, as well as an oversupply of full- and/or limited-service hotel inventory and multi-family residential properties in areas such as Florida, Nevada, Arizona and parts of California) leading to historic low levels of new construction with excess capacity in almost every asset class.
4. Bottom out, then recover – Some real estate asset classes are expected to bottom out and then start to recover in 2010. Rent levels will begin to rise with job growth and increases in consumer spending and gross domestic product (GDP), although this will likely be a slow rise. Some industry observers believe that the hospitality market has already bottomed out. Occupancy rates in 2009 were extremely low due to significant declines in leisure and business travel, which drove down the average revenue per available room (RevPAR). Multi-family residential may be the first to rebound because of the short term nature of their leases, with longer-term leased assets like retail, office and industrial recovering more slowly. Single-family home prices seem to have solidified, although it could take years for home values to truly recover.
5. Markets to watch– Although a handful of hospitality markets, including San Francisco and Atlanta, are expected to post positive room rate growth, the majority will need to wait until 2011 for a return to profitability. Bright spots in the office market include Washington, D.C., which has benefited from the federal government expansion, and New York, which has begun to turn around due to increased hiring at investment banks. Residential oversupply remains a problem across Miami, Atlanta, Phoenix and Las Vegas.
6. Where are the investors? – Capital is available and waiting to deploy, and the financing environment has improved somewhat, yet most commercial real estate investors have waited on the sidelines for a sense that values have reached bottom. Many of these investors will remain sidelined until better employment figures and consumer spending numbers spur a subsequent resurgence in real estate. However, some deal making that was evident during 2009 bodes well for 2010.
Public capital markets have shown increasing interest in commercial real estate, a trend that should continue in 2010 most notably via real estate investment trust initial public offerings (REIT IPOs) and secondary offerings. The U.S. should see a significant influx of foreign capital from Asia (especially China and Korea), Germany and the Middle East, as well as from domestic investors. Well capitalized REITs and funds will likely see increased opportunities to make distressed acquisitions, both geographically and across property types.
Florida AG McCollum warns of commercial foreclosure crisis
Attorney General Bill McCollum recently wrote to legislative leaders urging them to take note of the potential for “massive” foreclosures on commercial real estate, as many commercial real estate loans from Florida’s most recent boom reach the end of their terms about the same time.
McCollum is Florida’s current Attorney General and a gubernatorial candidate.
In his letter to Florida House Speaker Larry Cretul, McCollum wrote. “As one of the largest markets in the nation for commercial real estate loans, Florida faces a significant risk of financial loss.”
McCollum is urging lawmakers to look at some of the actions other large states have taken, including the passage of laws that require that all claims be consolidated into a single action, or prohibit certain lawsuits that seek to hit up borrowers personally before proceeding against the borrower’s collateral.
McCollum’s office created the Interagency Mortgage Crisis Task Force in 2008 designed to help educate and assist homeowners about to go into foreclosure. The task force has hosted community forums on the problem, providing distressed homeowners with access to lenders, counselors, voluntary bar associations, and state and federal housing and finance agencies.
McCollum believes that commercial real estate has a greater potential than residential housing to negatively impact the state and national economies over the next four years. Nearly $1.4 trillion in commercial real estate loans will reach the end of their terms between 2010 and 2014, and may trigger defaults, according to a February report of the Congressional Oversight Panel.
That could trigger economic damages to financial institutions, small business and families across the nation, McCollum said.
Other large states with similar demographic and growth issues already have put laws in the book that could ease the pain of commercial foreclosures. McCollum believes Florida should look at those laws to emulate.
One example of the laws passed in other states is the “one action” rule where all claims can be consolidated into a single action or prohibit lawsuits seeking relief from borrowers personally before proceeding against the collateral, he said. Other laws seek to establish a clear methodology for deficiency judgments, right of redemption and foreclosure defenses so that there are no ambiguities in the process.
Posted by Scott R. Lodde