12 October 2010
Hotel Lawyer with a cold splash of realism from new economic data! If you are not ready for the “long haul,” it is time to reassess your strategies . . .
The hotel lawyers of JMBM’s Global Hospitality Group® believe investors, borrowers and lenders should assess their options and develop their strategies based on realistic assumptions and the latest hard data. If you haven’t seen the latest, this is worth looking at.
On October 6, 2010, the International Monetary Fund or IMF released its latest appraisal of the situation for real estate on a global basis (in a report entitled World Economic Outlook October 2010 Recovery, Risk, and Rebalancing). The conclusion was that the prospects in the global real estate sector are “dismal,” with a downturn that could last eight years.
“Especially in the United States, given the limited success of mortgage modification programs and the shadow inventory from foreclosures and delinquencies, this has renewed fears of a double dip in real estate markets. A lot will depend on the path of economic recovery: if employment creation remains low, risks of a double dip in housing naturally increase,” the IMF said.
But the IMF data is not all that is new. Let’s take a look at some other significant data points, including those from Fitch, Deutsche Bank and Atlas Hospitality.
Scary “shadow inventory” from foreclosures and delinquencies
The IMF study stated that the overhang of shadow inventory might be serious enough to trigger the long-feared double dip economic retreat (but the IMF still does not “expect” a double dip). And whether or not it causes a double dip in real estate markets or whole economies, the overhang of distressed inventory clearly has negative implications for all real estate values.
How big is the shadow inventory?
It is hard to find a single report that gives a comprehensive picture of the commercial real estate (CRE) or hotel inventory problem in the U.S. Here are some data points that we try to tie together for your convenience.
Atlas Hospitality says California alone may have 1,500 hotels in shadow inventory. We have observed many times that California appears to be good barometer for the U.S. hotel industry, and we like the detail of the Atlas Hospitality surveys. A few days ago, Atlas released its latest update (through 2010 Q3) to it Distressed California Hotels Survey with interesting highlights including the following:
- The number of hotels in default or foreclosed on continued to increase through the third quarter as did the number of foreclosed hotels re-selling to new buyers.
- Atlas believes these increases will continue through the end of 2010 and will accelerate into 2011.
- There is a disproportionate number of hotels operating under some form of forbearance agreement, which is creating a huge “shadow” inventory of distressed deals that are yet to hit the default market. Atlas estimates that this inventory is as high as 1,000 hotels in addition to the 529 in default or foreclosed.
Deutsche Bank says 2/3 of loans maturing from now through 2018 cannot be refinanced. On a national scale, a recent Deutsche Bank report estimated that at least two-thirds of CMBS loans maturing between now and 2018 will unlikely qualify for refinancing at maturity without significant equity infusions from borrowers. We believe this estimate reasonably applies to the other CRE loans (i.e. non-CMBS loans).
IMF says $566 billion in CRE debt comes due in 2010 and 2011 in the U.S. Again at a national level, the IMF report cited earlier said that in the United States, $566 billion in CRE debt comes due this year and next. By the end of 2012, Deutsche Bank says the total CRE debt due will exceed $1 trillion! As a point of reference, note that about 25% of the CRE loans are CMBS loans. The rest are from banks, insurance companies and other lenders.
Fitch gives shocking numbers. A few days ago, a Fitch report said that despite the declaration by the National Bureau of Economic Research that the Great Recession is over . . .
- 10 states have CMBS loan delinquency rates in excess of 10% ranging up to a staggering 25% delinquency for Nevada.
- In September, hotel delinquencies in CMBS exceeded 21%.
The real key to a turnaround is employment.
While the hospitality industry fundamentals seem to be bouncing along a “bottom” with slowly improving fundamentals, we don’t see significant improvement until the employment picture in the U.S. really picks up.
Although some economic indicators have been encouraging lately, as Fitch Ratings Managing Director Mary MacNeill said recently, “National employment underpins demand for every property type and a jobless recovery for the U.S. economy foretells continued challenges ahead for commercial real estate.”
If employment is the key, things do not look good.
According to New York Times reporter, Catherine Rampell, in an article published October 8:
For the 14.8 million people out of work, the picture is not brightening. The average duration of unemployment continues to hover at record highs. In September, the typical unemployed worker had been searching for a job for 33.3 weeks.
The most optimistic projections we have seen suggest employment begins to turn around in mid to late 2011. Perhaps it takes a few quarters for that beginning to begin to affect consumer and business mindsets. Maybe it takes a year or two. It is hard to envision a significant improvement in employment until 2012 or 2013 at the earliest.
Then consider the daunting shadow supply of defaulting and to-be-foreclosed real estate as lenders finally come to grips with severely over-leveraged CRE, including hotels. Most lenders cannot be long-term owners of distressed real estate, so they will be forced to sell the distressed real estate at some point, particularly as they see little benefit in longer holding periods with slow property value increases, and are forced to deal with new regulations and higher capital requirements.
Look for more CRE and hotel loan defaults. This leads the hotel lawyers of the Global Hospitality Group® to see a very long, and painfully slow recovery for the income and value of CRE and hotels. This will mean that present values of future hoped-for increases will likely fall from current levels. We are relieved to see hotel industry fundamentals improving, but these improvements too will most likely follow the jobs outlook, with no serious improvements until we can sustain new job market entrants and make some significant headway in putting the 14 million unemployed Americans back to work.
In any event, look for a lot more CRE and hotel loan defaults – CMBS and traditional – and expect the shadow inventory to grow until it can’t be held back any more. This should be an “interesting” year!
This is Jim Butler, author of www.HotelLawBlog.com and hotel lawyer, signing off. We’ve done more than $87 billion of hotel transactions and have developed innovative solutions to unlock value from troubled hotel transactions. Who’s your hotel lawyer?
Our Perspective. We represent hotel lenders, owners and investors. We have helped our clients find business and legal solutions for more than $87 billion of hotel transactions, involving more than 3,900 properties all over the world. For more information, please contact Jim Butler at firstname.lastname@example.org or 310.201.3526.
Jim Butler is a founding partner of JMBM and Chairman of its Global Hospitality Group®. Jim is one of the top hospitality attorneys in the world. GOOGLE “hotel lawyer” and you will see why.
JMBM’s troubled asset team has handled more than 1,000 receiverships and many complex insolvency issues. But Jim and his team are more than “just” great hotel lawyers. They are also hospitality consultants and business advisors. For example, they have developed some unique proprietary approaches to unlock value in underwater hotels that can benefit lenders, borrowers and investors. (GOOGLE “JMBM SAVE program”.)
Whether it is a troubled investment or new transaction, JMBM’s Global Hospitality Group® creates legal and business solutions for hotel owners and lenders. They are deal makers. They can help find the right operator or capital provider. They know who to call and how to reach them.