Will hotel supply and demand levels ever return?
April 18, 2010
In an article written for Hotel & Motel Management, Senior Editor, Jason Freed ponders the question above as hotelier’s bank on a break in one of the worst industry recessions ever.
Each time occupancy levels dip and hotel owners and managers aren’t meeting forecasted revenues, analysts and investors are assured the hotel industry is cyclical by nature and will surely rebound.
But after two years into a downturn that many are calling the worst in history, hoteliers are again left pondering the same harsh realities regarding supply and demand. Are we in a business model that is a “new normal?”
The same thing happened after 9/11 and everyone said nothing would ever be the same again.
From firsthand experience, I can feel everyone’s pain since I opened a new 126-room Hilton Garden Inn here in Fort Myers a week after 9/11. The years following were the worst I ever experienced … until now.
But I don’t buy into the belief that there is some type of “new normal”. Eventually things will get better, financing will come back and there is a light at the end of the tunnel.
The article in Hotel & Motel Managementwrites about the twenty-five history of information collected by Smith Travel Research. Since the company began collecting data in 1986, there has never been a larger decrease in year-over-year revenue per available room than the 15.9% DECREASE from January 2008 to January 2009. The closest revenue losses were from January 2001 to January 2002, when RevPAR fell 13.2%. By 2003, the industry had rebounded rather quickly, posting a 2% year-over-year increase in January.
Again, I can personally vouch for the fact since our Hilton Garden Inn recovered nicely and in 2004 the hotel had its best year ever. Shortly thereafter we sold the property for high price as buyers replenished there cash positions and cap rates plummeted.
However, as the article points out, this time things are different. From January 2009 to January 2010, RevPAR was down an additional 7%.
Although the economy can be blamed for both business and leisure travelers cutting down on trips, excessive supply has much to do with the current downturn as well. In Lee County Florida, the hotel base ballooned in 2009 as some 1,300 hotel rooms were opened. This in an area of the country where no more than 200 new rooms would be acceptable.
Some blame can be pointed at the franchisors who proliferated the market with subsets of their brands and then “went wild” approving licenses. And developers who did not understand the local markets were getting capital so easily that they weren’t restrained by good underwriting.
It’s going to take us a while to reach a level of occupancy that’s going to sustain an increase in profitability.
How long it will take to reach a level of occupancy that will sustain a level of profitability is uncertain but will definitely be tied to the growth in GDP and a drop in unemployment.
What is for certain is that new hotel construction has dropped like a brick.
According to the March 2010 STR/TWR/Dodge Construction Pipeline Report released this week, the total active U.S. hotel development pipeline includes 3,399 projects comprising 354,538 rooms. This represents a 35.7% decrease in the number of rooms in the total active pipeline compared to March 2009.
Fifteen of the Top 25 Markets have more than a 50% decline in year-over-year rooms in construction.
The same phenomenon occurred following 9/11 and as a result occupancy eventually came back to sustainable levels. As occupancy levels increased, average daily rates rose as well.
It will happen again this time around … it just may take a little longer.
Posted by Scott R. Lodde
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
Headlines – Week of February 28, 2010
March 8, 2010
Jones Lang Predicts Increased Hotel Lending (from the Jones Lang LaSalle Hotels Debt Capital Markets Update)
A recent edition of the Jones Lang LaSalle Hotels Debt Capital Markets Update predicted that a broader recovery in the debt capital markets has begun and it is extending into hospitality assets. The update noted that hotels have been blacklisted by many lenders over the past 18 months but have recently drawn the attention of the more traditional lending institutions.
They note that hospitality lending now offers better locations, coverage and pricing than most other asset classes. Hotels have caught the attention of both foreign and domestic lenders looking to deploy capital early in the year.
Similar to other recent publications, they note that pent-up equity capital is geared to return to the market and these providers are turning to creative hospitality structures. They note the increase in “rescue capital’” wherein a new equity provider injects fresh capital into a deal in conjunction with the lender agreeing to re-balance the debt and the borrower agreeing to subordinate their returns.
They note these recapitalizations as being a win-win-win situation for the borrower, lender and new equity provider. Distressed borrowers are able to live to fight another day, lenders are able to pay down their exposure while re-structuring the remaining debt according to today’s underwriting, and the new equity gets to deploy capital at attractive returns. Rescue equity recapitalizations have the effect of removing the hotel from the distressed asset list while keeping both the borrower and the new equity motivated to perform at a high level.
Florida Expected to Grow Again (from the University of Florida – Bureau of Economic and Business Research)
A new estimate from the University of Florida indicates that Florida’s population should rebound this year from its first loss in more than half a century.
Florida is expected to add about 23,000 residents between April 1, 2009, and April 1, 2010, following a loss of almost 57,000 residents the previous year, according to projections released by the University’s Bureau of Economic and Business Research.
Despite these gains, the report states Florida will not return to its average annual increase of 300,000 until 2014 or 2015. The state’s population grew by more than 400,000 residents a year during the housing boom between 2003 and 2006.
Due to the bursting of the housing bubble and the severe national recession, Florida lost more than 800,000 jobs between the fall of 2007 and the fall of 2009, and the state unemployment rate rose from about 4 to 11 percent. The declining economy led to a huge slowdown in population growth between 2007 and 2008 and a population loss between 2008 and 2009. The loss was the first since military personnel left the state at the end of World War II.
The study estimates the total number of state residents will grow from 18,750,000 to 18,773,000 between April 2009 and April 2010. According to long-term projections, state population is expected to reach approximately 21,247,000 in 2020, 22,574,000 in 2025, 23,821,000 in 2030, and 24,971,000 in 2035.
The biggest numerical increases forecast between 2010 and 2035 are in large counties. Orange County is projected to add the most new residents, 512,200; followed by Hillsborough, 471,800; and Miami-Dade, 457,200.
In terms of percentage increases, the biggest leaders over the next quarter century are projected to be Sumter and Flagler counties, growing by 111 percent and 109 percent, respectively.
The Villages, a huge retirement community in Sumter County will be one of the biggest factors in this growth.
Monroe is the only county projected to lose population over the next 25 years, declining by about 4 percent.
Top 10 Cities with Climbing Home Prices (from Forbes.com)
Home prices aren’t tanking everywhere. In some cities they have bounced pretty high off the bottom, according to a report in Forbes magazine.
For the report, Forbes used the research firm, Altos Research. Altos Research pulled data for every U.S. city with at least 100 homes on the market (roughly 8,000 cities), and found those with the biggest price jumps from the previous year. Altos produced data on an individual city level, rather than using Metropolitan Statistical Areas. Altos used median asking prices based on a 90-day-rolling average as of Feb. 12, 2010 and tracked asking prices for single-family homes but not condominiums.
1. Lexington, Mass., +36 percent
2. Bay Village, Ohio, +32 percent
3. Sunnyvale, Calif., +32 percent
4. Poway, Calif., +27 percent
5. University City, Mo., +28 percent
6. Ambler, Pa., +26 percent
7. Allison Park, Pa. , +25 percent
8. New Braunfels, Texas, +25 percent
9. Kemp, Texas, +24 percent
10. Arcadia, Calif., +24 percent
Headlines – Week of February 22, 2010
February 28, 2010
Sharpest Decline in Lending Since 1942 (from the Wall Street Journal)
According to a recent article in the Wall Street Journal, U.S. banks registered their biggest full-year decline in total loans outstanding in 67 years.
FDIC Chairman Sheila Bair believes the number of bank failures in 2010 will likely increase from the 140 recorded last year.
Tracking the Nation's Bank Failures
A survey by the Federal Reserve showed banks have slowed their efforts due to 1) the tightening lending standards put into place over the past two years and 2) a slowing demand for loans from businesses and consumers.
In addition, according to according to the FDIC, the number of U.S. banks at risk of failing hit a 16-year high at 702.
FDIC Problem Institutions
More than 5% of all loans were at least three months past due, the highest level recorded in the 26 years the data have been collected. And the problems are expected to last through 2010.
Bank Report-FDIC Portrait
One issue complicating banks’ ability to lend is the looming problem of troubled commercial-real-estate loans. The FDIC’s report revealed that asset-quality indicators for banks continued to deteriorate in the fourth quarter as borrowers continued to fall behind on their loans. Banks wrote down $53 billion in loans in the final three months of last year. The quarterly write-off rate was the highest ever recorded in the 26 years the FDIC has collected the data. A total of $391.3 billion of all loans and leases, or 5.4%, were at least three months past due at the end of 2009.
Full Article
The News Hub Video
Is the Recession Over for Hotels? (from PKF Hospitality)
According to the National Bureau of Economic Research (NBER) the U. S. entered an economic recession in December 2007. According to Smith Travel Research (STR), the U.S. lodging industry first began to show signs of weakness in July 2006, well before other business when year-over-year demand levels contracted by 14%. Total hotel demand declined 1.8% in 2008 and according to Hospitality Research total year decline in demand in 2009 of 6.3%.
The U.S. Gross Domestic Product grew 3.5% in the third quarter of 2009 as the recession ended after eight (8) quarters. PKF forecasts that the nine consecutive quarters of declining demand for U.S. hotels that began in the first quarter of 2008 will come to an end in the second quarter of 2010
As in past recessions, less demand leads to reduced construction of additional supply typically persisting three years past the beginning of the economic recession.
According to PKF, analysis of the data relating to the current 2007 recession reveals a distinctly different experience. Supply growth in the fourth quarter of 2007 was approximately 1.7%, slightly below the long-run average level of 1.9%. Contrary to the previous downturns, room capacity following the start of this recession expanded in 7 of the 8 quarters immediately following. The current PKF forecast calls for above-average supply growth into the first quarter of 2010, the tenth month following the start of this recession.
Hotel Supply Growth Patterns
While economic declines always lead to lower levels of lodging demand growth, following the start of the 1990 recession demand levels did not contract until one year after the recession began. This was different from the demand declines that were realized almost immediately when the 2001 and 2007 recessions began. The subsequent stigma associated with travel away from home was a major factor following the events of 9/11, while in the 2007 recession, the simultaneous occurrence of a stock market crash, the bursting of the housing bubble and the erosion of credit availability resulted in a severe economic downturn. As a result, significantly levels of reduced lodging demand occurred immediately.
Hotel Demand Growth Patterns
The current severity of the disconnect between the property cycle (supply increasing) and the business cycle (demand contracting) this time around is nearly ten-times as large as what was experienced in 1990-93 and twice as large as that realized in 2001-2004.
According to the December edition of PKF-HR’s Hotel Horizons, average daily rates will begin to realize their first year-over-year increase in the fourth quarter of 2010, representing the end of eight consecutive quarters of decline that began in the fourth quarter of 2008.
According to the PKF report, extraordinary declines lead to above-average recoveries, and they expect such will be the case with the current cycle. After the past two recessions, demand grew a cumulative 12.5% during the three-year period commencing the quarter after which the recession ended. The December 2009 Hotel Horizons® states that demand grow will be more than twice that amount as the industry recovers from the current recession. This demand growth will lead to the absorption of the new rooms that have been overwhelming many markets. They believe that above-average increases in room rates will commence in the second half of 2011.
Half of South Florida homes sell for a loss
According to a recent report from Zillow.com, 47% of South Florida (Broward, Miami-Dade and Palm Beach) houses were in “negative equity” as of December, 2009, a 4 percent increase from the previous year . In the Treasure Coast (Indian River, St. Lucie, and Martin counties), the picture is even worse. There, 65.7 percent of borrowers are upside down.
Nationally, 28 percent of homes sold for a loss in December.
15 Top Retirement Cities
According to CNBC, Baby Boomers are willing to move farther than previous generations when they retire, and they are choosing places unlike stereotypical retirement hotspots.
The top places listed by AARP are:
1. Loveland/Fort Collins, Colo.
2. Las Cruces, N.M
3. Rehoboth Beach, Del.
4. Portland, Ore.
5. Greenville, S.C.
6. Sarasota, Fla.
7. Ann Arbor, Mich.
8. Tucson, Ariz.
9. Montpelier, Vt.
10. Honolulu
11. Santa Fe, N.M
12. Atlanta
13. Charleston, S.C
14. Northampton, Mass.
15. San Diego, Calif.
Posted by Scott R. Lodde
Headlines – Week of February 14, 2010
February 20, 2010
U.S. Hotel Pipeline Declines Dramatically (from Smith Travel Research)
The recent STR/TWR/Dodge Construction Pipeline Report indicates a dramatic decline in the total active U.S. hotel development pipeline. The report represents a 35.9% decrease in the number of rooms in the total active pipeline compared to January 2009. The total active pipeline data includes projects in the In Construction, Final Planning and Planning stages, but does not include projects in the Pre-Planning stage.
Midscale without F&B continues to lead all Chain Scales with rooms in construction. Hotels in this segment include such brands as Holiday Inn Express, Hampton Inn & Suites and Candlewood Suites. While this segment is the most active of all segments, it is still down over 31.6% compared to last January.
|
U.S. Pipeline by Chain Scale Segment |
||||||
|
Number of Rooms and Percent Change (January 2010 vs. January 2009) |
||||||
| Chain Scale |
Existing Supply |
% Change |
In Construction |
% Change |
Total Active Pipeline |
% Change |
| Luxury |
107,748 |
6.3% |
3,116 |
-59.4% |
6,431 |
-53.1% |
| Upper Upscale |
601,152 |
2.4% |
9,110 |
-48.8% |
20,226 |
-48.2% |
| Upscale |
510,897 |
9.4% |
22,449 |
-58.7% |
85,379 |
-42.2% |
| Midscale w/ F&B |
510,063 |
0.4% |
6,633 |
-25.3% |
21,904 |
-26.5% |
| Midscale wo/ F&B |
826,656 |
6.3% |
31,040 |
-51.0% |
116,490 |
-31.6% |
| Economy |
766,875 |
0.9% |
3,828 |
-60.4% |
9,130 |
-55.5% |
| Unaffiliated |
1,513,538 |
1.9% |
12,294 |
-56.8% |
118,585 |
-29.8% |
| Total |
4,836,929 |
2.9% |
88,470 |
-53.5% |
378,145 |
-35.9% |
Among the Chain Scale segments, five of the seven segments reported decreases of more than 50 percent of rooms in the In Construction phase. The Economy segment experienced the largest decrease, falling 60.4%, followed by the Luxury segment (-59.4%) and the Upscale segment (-58.7%). The Midscale without Food and Beverage segment ended the month with the most rooms in the In Construction phase with 31,040 rooms.
Jones Lang LaSalle Releases Annual Survey at MBA Conference
According to findings from Jones Lang LaSalle’s annual 2010 Lenders’ Production Expectations Survey, 43% percent of respondents expect their loan production to range from $2 to $4 billion in 2010, a number that is more than double the rate that lenders reported in the 2009 survey.
Senior officials at Jones Lang stated that with more than $1 trillion worth of commercial real estate loans expected to mature between now and 2013, a majority of borrowers are placing significant importance on restructuring loans. However, many financial institutions don’t want to hold on to assets and now are coming to terms with the fact that they can no longer ‘extend and pretend’. They’re now realizing it makes good sense to move these assets off their balance sheets to create greater ability to originate loans this year.
The survey expressed the following quotes for average debt coverage ratios:
• Life companies: 2.25 for hotels, 1.30 for multifamily, 1.40 for office, 1.60 for retail, and 1.50 for industrial.
• CMBS: 1.35 for hotels, 1.25 for office, 1.20-1.25 for retail, and 1.20 to 1.25 for industrial.
• Banks: 1.50 for hotels, 1.35 for multifamily, 1.50 for office, 1.50 for retail, and 1.50 for mixed-use.
• Private equity: 1.15 for multifamily, 1.20 for office, 1.20 for retail, 1.30 for industrial, and 1.30 for mixed-use.
The sectors that most lenders would most prefer to lend, include multifamily and office.
The hotel sector stands out as the sector to which lenders are least likely to lend, although a select number of lenders indicated an interest in hotel investments given their belief that the sector is at bottom.
A small amount of lending returned to the Commercial Mortgage-Backed Securities (CMBS) market in 2009 with nearly $1 billion in loans. 48% of respondents say they expect CMBS issuance to range from $0 to $10 billion in 2010, while 27 percent predict production of $10 to $20 billion and an additional 21 percent with $20 to $30 billion expectations. In 2011, the greatest number of respondents (38%) expects CMBS issuance of between $20 to $30 billion.
The survey indicated a significant increase in the number of lenders who are selling performing and non-performing loans. These lenders are prepared to accept significant discounts in 2010 to create liquidity and to rid themselves of these non-core or problem assets. For performing loans, 29% of respondents indicated they are selling performing notes at 90 cents on the dollar and another 24% are selling performing loans between 70 cents and 80 cents on the dollar.
Bailout Panel Reports on Commercial Real Estate Losses
According to a report by the Congressional Oversight Panel dated February 10, 2010, over the next several years, failed commercial real estate loans could litter American cities with empty stores and office complexes cause hundreds of bank failures and weaken the economy.
The report, entitled Commercial Real Estate Losses and the Risk to Financial Stability states that banks face up to $300 billion in losses on loans made for commercial property and development. The Congressional Oversight Panel monitors the government’s efforts to stabilize the financial system.
The report says the defaults could lead to reduced lending and cause the eviction of families from rental properties. Bank failures also could contribute to job losses and hurt the economic recovery.
Smaller banks are more vulnerable to the losses than their larger Wall Street counterparts. That’s because commercial real estate makes up a larger portion of their portfolio.
Small- and mid-size banks have been failing at the fastest rate since the savings and loan crisis of the 1980s and 1990s. The failures are due mostly to bad loans they made for commercial projects. The Federal Deposit Insurance Corp. (FDIC), which manages bank failures and insures deposits, is under stress that will intensify over the next few years. In 2009, there were 140 bank failures under the supervision of the FDIC. By comparison, there were 25 bank failures in 2008. In 2010, it has been estimated that around 200 banks under FDIC supervision could fail.
Commercial property values have fallen more than 40% in the past three years, the report notes. Some have been unable to pay the loans. Others have stopped paying because they now owe more than the properties are worth.
Unlike residential mortgages, commercial loans are refinanced every three to five years. Between 2010 and 2014, about $1.4 trillion in commercial real estate loans will come due for refinancing. For nearly half of them, borrowers could struggle to get new financing because they’ll owe more than the properties are worth.
Last year’s tests gauged banks’ strength only through 2010. The commercial real estate threat looms largest in 2011 and beyond.
Headlines – Week of January 31, 2010
February 5, 2010
Federal Reserve to End Mortgage Purchase Program (from the Washington Post)
The cessation at the end of March of the government program to buy mortgage-backed securities will show whether the White House and Federal Reserve have effectively stimulated the lending market to the point that it is now on solid footing.
Keeping the mortgage rates at historic lows, which required a commitment of more than $1 trillion, was viewed within the administration as a central plank of the economic strategy last year, senior officials said.
Here are the facts:
- The Treasury Department began to spend $220 billion in September 2008 to buy mortgage-backed securities before ending the program in December, 2009.
- The Federal Reserve pledged to buy $1.25 trillion worth of mortgage-backed securities, the largest single intervention the central bank has undertaken amid the financial crisis and recession. The Fed has said it will end this program on March 31.
- Fannie Mae and Freddie Mac, the two firms that own or guarantee half of the nation’s $12 trillion mortgage market, were taken over by the government in September 2008. The move helped these firms borrow at low rates because lenders know they cannot fail. They passed on these savings to consumers in the form of low rates. On Christmas Eve, the Treasury said it would cover all of their losses, but said that holdings of mortgage-backed securities must be scaled back over time.
If the sector slumps again, home owners could face a new period of distress.
Lawrence Yun, the chief economist of the National Association of Realtors has cautioned the Fed about the sudden stoppage of this program on the housing market.
Keeping mortgage rates at record lows was a major component of the economic strategy during President Obama’s first year in office. While it did capture the kind of headlines that efforts to bail out banks did, the policy helped revitalize home buying in parts of the country and assisted millions of home owners who were able to refinance.
The effect of canceling this program could be devistating to the residential home market.
U.S. hotel performance for 2009 by quarter (from Hospitality.net/Smith Travel Research)
Smith Travel Research reported that the U.S. hotel industry reported decreases in all three key performance metrics for fourth-quarter 2009 in year-over-year measurements.
Occupancy dropped 4.4 percent to 50.6 percent, average daily rate fell 7.6 percent to $95.79, and revenue per available room decreased 11.7 percent to $48.50.
|
U.S. Hotel Performance for 2009 by Quarter |
||||||
|
Occupancy |
% Change |
ADR |
% Change |
RevPAR |
% Change |
|
| 1st Qtr |
51.4% |
-10.9% |
$ 100.13 |
7.7% |
$ 51.44 |
17.7% |
| 2nd Qtr |
57.8% |
-10.9% |
$ 97.37 |
9.7% |
$ 56.25 |
19.5% |
| 3rd Qtr |
60.5% |
-7.9% |
$ 96.84 |
9.8% |
$ 58.61 |
16.9% |
| 4th Qtr |
50.6% |
-4.4% |
$ 95.79 |
7.6% |
$ 48.50 |
11.7% |
| YTD |
55.1% |
-8.7% |
$ 97.61 |
8.8% |
$ 53.71 |
16.7% |
Although room demand (room nights sold) had its best quarterly performance of 2009 it was still down 1.4 percent in the 4th quarter. The report noted however that 11 of the Top 25 Markets experienced occupancy gains in the fourth quarter.
The Luxury segment was the only segment to report an increase in any of the three key metrics. The segment’s occupancy rose 1.4 percent to 60.6 percent. The Upper Upscale segment ended the quarter virtually flat with a 0.1-percent decrease to 61.1 percent.
For all of 2009, RevPAR for U.S. hotels fell 16.7%, compared to 2008; ADR and occupancy numbers were equally downbeat. ADR for the year was off 8.8%, compared to prior year, while occupancy fell 8.7%.
Houston had the greatest occupancy decline–17%–of any of the country’s top MSAs, while New York had the greatest drop in RevPAR, 26.3%.
Commercial prices must fall, economist says (from the Miami Herald)
In a recent address to the South Florida chapter of the NAIOP, Mark Dotzour, the chief economist and director of research for the Real Estate Center at Texas A&M University was recently quoted as stating that in order for the commercial real estate market in South Florida and around the country to recover, buyers and sellers need to come to terms on the new price reality.
Dotzour predicted is that equilibrium is getting closer, and when it does there will be an influx of new money that has been sitting on the sidelines waiting.
He believes that there’s a lot of demand but they just won’t because they’re convinced it’s not priced properly.
Holding this up are the banks that don’t want to write down the value of the assets on their books and continue to play the game of “extend and pretend.” Extend and pretend is a term used to describe when a bank extends the loan coming due rather than accept the new reduced value of the real estate.
According to Dotzour, overall the current prices for commercial real estate have dropped between 35 percent and 50 percent compared to 2007 values.
Improvement in the real estate market will begin in 2010 with a stronger recovery by 2011, at which point there will be an increase in absorption of vacant space, rents will start to rise and property values will increase, Dotzour predicts.
But he also warns that buyers waiting for fire sale prices on distressed properties, like those seen during the savings and loan crisis of the 1980s are going to be disappointed.
Full Article
Hotel Loan Originations Jumped 105% in Q4 2009 (from Mortgage Bankers Association)
Finally some good news on the financing front.
According to the Mortgage Bankers Association’s fourth quarter 2009 survey of commercial mortgage loan originations, a 105% jump in hotel loans on a year-over-year basis helped send overall commercial loan originations 12% higher over the same time period.
The hotel sector’s increase was the largest of any commercial real estate sector, with the retail segment trailing right behind with a 101% increase.
In Q4 2008, the MBA recorded 36 hotel loan originations, the lowest the hotel sector had seen since the early part of the decade. In Q4 2009, there were 74 hotel loan originations.
The average loan size for hotel loans in Q4 2009 was $48.7 million. A year earlier it was $22.5 million.
10 Cities Where It’s Smarter to Buy (from Forbes.com)
A recent Forbes reports that the spread between what a person would pay in rent and what they’d pay for a mortgage is much lower than the 15-year average in many cities.
To determine what cities are the best buys, Forbes computed the premium and also identified locales where economists predict home prices will go up the most over the next five years.
Here are the top 10 cities the magazine chose as the best places to buy right now.
- Boston-Cambridge-Quincy, Mass.
- Charlotte-Gastonia-Concord, N.C.-S.C.
- Chicago-Naperville-Joliet, Ill.-Ind.-Wis.
- Cincinnati-Middletown, Ohio-Ky.-Ind.
- Denver-Aurora-Broomfield, Colo
- Minneapolis-St. Paul-Bloomington, Minn.-Wis.
- Philadelphia-Camden-Wilmington, Pa.-N.J.-Del.-Md.
- Portland-Vancouver-Beaverton, Ore.-Wash.
- San Francisco-Oakland-Fremont, Calif.
- Washington-Arlington-Alexandria, D.C.-Va.-Md.-W.V.
Posted by Scott R. Lodde
Serious About A Hotel Sales Career?
November 10, 2009
Serious About A Hotel Sales Career?
Here are 10 Recommendations
Is hotel sales your current or desired career path? If so, sincere congratulations! Good salespeople (rooms or catering) are in demand in all segments. But why settle for good when excellence is within your reach? Great salespeople can virtually write their own tickets. Debbi Fields (of Mrs. Fields cookie fame) had excellence in mind when she developed her tagline, “Good enough… never is!”
So what can we do as aspiring salespeople to “get to the next level”? Here are 10 of my favorite recommendations:
1. If you are affiliated with a “flag,” attend as much of your brand’s training as you can.
2. If you work for a management company that provides its own “in-house” training, take advantage of that as well.
3. Maximize your on-the-job learning and reduce your learning curve by asking for advice from any available sales mentors at your property, within your management company, or even from successful salespeople at friendly competitors.
4. Go to industry events like HSMA or NACE meetings.
5. Practice your selling skills at local Chamber of Commerce networking events.
6. Attend personal development seminars that focus on selling techniques, communication skills, or even general business principles.
7. Buy (and please read) books on selling (“Lessons From the Field” by Howard Feiertag and John Hogan), negotiating (“Essential Managers’ Negotiating Skills” by Tim Hindle), or cutting edge communication skills (“The Magic of NLP: Demystified” by Byron Lewis).
8. Subscribe to generic magazines (“Selling Magazine”) or industry-specific publications (“Hotel Business Magazine” which is free) as well as free e-newsletters (“HotelOnline.com… congratulations!) that feature articles designed to improve your “SQ” (sales quotient).
9. Ask prospects and customers what they dislike and really like about hotel salespeople, and then “cut” from or “paste” to your existing personality traits.
10. This last suggestion is my personal favorite. Enroll ASAP in “Auto University” (AKA “Auto U”) and get your degree in mobile selling. It’s easy, time-effective, and career-enhancing. All you do is invest in a few audio books-on-tape or CD’s and listen while you drive to and from work or between outside sales calls. Feed your mind with new ideas on selling by learning from such “surrogate mentors” as Jeffrey Gitomer, Dennis Waitley, Brian Tracey, or the master himself, Zig Ziglar. Nothin’ wrong with listening to your favorite music most of the time in your car, but “Jenny From The Block” won’t do as much for your career as your personal sales mentors from “Auto U.”
Submitted by:
Ed Iannarella, President
Stonehenge Consulting Group
17149 Wrigley Circle
Ft. Myers, FL 33908
239-481-5586
ed i@comcast.net
Is the Other Shoe beginning to drop?
October 29, 2009
Much has been written about the upcoming demise of the commercial market, the so-called other “shoe” of real estate. Back in August I wrote an article for the blog entitled “Distressed Commercial Real Estate by the Numbers”. In it I quoted George Ratiu, a NAR economist. According to Mr. Ratiu, as of June of this year, the amount of commercial real estate in “distress” (defined as foreclosed, REO, or delinquent properties) had risen to $108 billion, a 107% increase in six months. Of that amount, the retail sector led the pack at around $17.8 billion with hotels coming in second at $11.8 billion.
In a more recent article published by KPMG it is estimated that, in the U.S, around $2.2 trillion of commercial properties bought or refinanced since 2004 are now worth less than the original price. According to the article, as of July 2009 around $124 billion of commercial properties have fallen into default, foreclosure or bankruptcy since prices started falling and fewer than 10 percent have resolved their financing issues. In the US, the banking industry is facing losses of around $200 – $230 billion on commercial property loans.
According to an article published in Florida Trend magazine, Florida banks have $56 billion in commercial loans or 34% of bank assets. Severely distressed loans (as a percentage of assets) are 15 times what they were in 2006 and at the end of the 2nd quarter, those banks had $5.1 billion in commercial, apartment and construction and land development loan in default, up from $274 million in 2006.
According to the article, Orlando has a17.4% office vacancy rate and Palm Beach and Jacksonville have some of the highest office vacancy rates in the country at 22.5% and19.9%, respectively.
Here in Lee County a number of high profile foreclosure proceedings have finally started against commercial developers/investors. Today, the Fort Myers News Press reported that an apartment complex which sold for record-breaking $79.6 million is now in foreclosure. The complex was bought as a condo conversion project in March 2006 and never moved forward. In this case, the foreclosure was initiated by the LLC which acquired the note from the FDIC after it declared Corus Bank, the original lender, insolvent September 11th of this year. In another instance, BankUnited filed a $6.8 million foreclosure lawsuit against Bonita Springs-based McGarvey Development, a major builder of commercial buildings and upscale homes in Southwest Florida. The newspaper also reported that Cape Coral real estate empire of developer/broker Greg Eagle is being hit by a barrage of foreclosures and court judgments. Lenders have begun eight separate foreclosure lawsuits in Lee circuit court for big parcels of land he was assembling for a regional mall.
It appears that the long anticipated “other shoe” may indeed be dropping.
Scott R. Lodde
Hilton Break-up True?
September 9, 2009
According to a news report by The Independent, a UK newspaper, Blackstone is looking at a range of options for the hotel group, including public listings for parts of the chain along geographic lines, debt-for-equity swaps with lenders, as well as trade sales of portfolios of hotels to rival companies. As many of you know, Blackstone purchased Hilton for $26 billion at the peak of the buyout bubble in July 2007, financed with $20.6 billion of debt. It was reported they took a 49% write-down on Hilton Hotels Corp. at the end of 2008. This according to shareholder documents obtained by peHub.com, a Web site of Thomson Financial. Blackstone’s equity investment in the Hilton deal is held in its fifth buyout fund, BCP V.
Blackstone was on a hotel buying spree for many years. The company acquired MeriStar, whose portfolio includes the South Seas Plantation Resort here in Southwest Florida, La Quinta Inns, and Extended-Stay America which was subsequently sold to the Lightstone Group and is now in bankruptcy.
Speculation is rampant that the Hilton group of hotels could be broken up under plans being drawn up. Like many other hotel owners, Blackstone needs to maximize value from Hilton ahead of debt repayment deadlines in three to four years.
The Independent article reported that “with the $21billion worth of debt raised to buy Hilton back in 2007 it isn’t going to be easily refinanced. The costs on servicing the debt aren’t onerous, but the world has changed a lot since this deal was done and preparations need to be made.”
Blackstone has historically has been attracted to high-end, full-service hotels. In 2004, the company acquired Boca Resorts which includes the Naples Grand in Naples, FL, now part of The Waldorf Astoria Collection. Many believe the approach will be to break up the Hilton company and selling it in smaller pieces. This might provide more on the open market than selling the company as a whole. Even more appealing to the company might be breaking it up and taking some of the pieces public. Such a transaction might include 1,700-hotel Hampton Inn brand, the Hilton Garden Inn brand and the Homewood Suites brand all of which are now are located in Memphis, TN. The company could also secure a separate public offering for La Quinta.
However Blackstone has denied reports for any split and a spokeswoman for the group stated that plans for a breakup of Hilton were “categorically untrue”.
More Distress for Hotel Lenders
August 17, 2009
click to enlarge
I recently posted a report regarding the recent increase in hotel loan delinquencies on August 7th. Now an article in the Wall Street Journal entitle Hotels Deliver Some “Jingle Mail” speaks of a rise in hotel forfeitures being the greatest since the early 1990′s. The article states that distressed “noncasino” hotel loans now include over 1,000 properties with a cumulative loan value of $16.8 million. The article gets its statistics from Real Capital Analytics, and encompasses delinquencies, foreclosures, bankruptcies and restructurings of securitized mortgages in addition to loan from banks and other institutions.
The article points to a topic I discussed in a post written on July 8th (see An Inside Look into the Commercial Real Estate Mess) – the difficulty of restructuring loans that were packaged into commercial mortgage-backed securities (CMBS).
The particular problem associated with hotel loans is that unlike other types of real estate such as malls and office building with long-term leases, hotels have daily rentals and can empty out overnight. Such was the case in a number of recent highly publicized foreclosures involving the Mondrian boutique hotel in Scottsdale, AZ, the ST. Regis resort in Dan Point, CA and the W in San Diego, CA.
What’s interesting in this article is the strategy used by Sunstone Hotel Investors, a Southern California-based lodging real estate investment trust and the owner of the W San Diego and many other hotels. They are simply walking away from some of their 39 upscale hotels and are using this strategy to get the loan servicer to agree to new terms with the bondholders on other transactions.
According to a noted hotelier quoted in the article, “Forfeiting a property to a lender doesn’t have the same stigma attached to it in this cycle as it did in past cycles”.