Published on:

Hotel Lawyer: Uh Oh! Now they are using the “D” word

28 February 2009

Hotel Lawyer update on economy.

On Friday, the US Commerce Department revised its estimate of the economy’s performance for the last quarter of 2008. Instead of an “abysmal” 3.8% contraction estimated earlier, the revised figures say that our Gross Domestic Product or GDP declined at a scary 6.2% rate. And yesterday was also the first time I have seen the New York Times describe the mess we are in with the “D” word . . .

The “D” Word!

On Friday, the New York Times said that economists are starting to use the word “Depression” to describe the economy’s accelerating downward spiral. In an article by Peter S Goodman, entitled “Sharper Downturn Clouds Obama Spending Plans,” the Times said:

The fortunes of the American economy have grown so alarming and the pace of the decline so swift that economists are now straining to describe where events are headed, dusting off a word that has not been invoked since the 1940s: depression.

Mr. Goodman carefully points out that the comparisons are NOT being made to the Great Depression of the 1930s, when unemployment reached 25%,. Some economists are conservatively projecting that “depression like” scenarios have 15% to 25% probability, with others say we are already there, at least in the housing market, the financial system and the stock market.

At some point, this does sound like an argument over semantics. It is reminiscent of how some pundits refused to call the stock market meltdown last year a “crash”. Everyone agreed that the Dow’s 22% decline over 8 days was roughly the equivalent of the “crash” in October 1929 when the market declined 12.8% on October 28, 1929 and another 11.7% the next day. The semantic experts thought 8 days might be too long a period to call it a “crash” compared to 2 days.

I don’t know about you, but the extra few days did not make my stock portfolio look any better when it was over. We may not be in a depression yet, but the accelerating rate of decline is truly worrisome.

What does this mean for the hospitality industry??

The articles listed below (with links to their postings) describe the practical effect of all this on the hospitality industry.

There is a very close relationship between lodging demand and changes in the GDP. It is often a 1 to 1 correlation — very high. So the revised GDP numbers for 2008 do not bode well.

However they are consistent with the latest projections from PKF Consulting, PricewaterhouseCoopers, and Moody’s for big declines in the net operating income or NOI for hotels, and a big decrease in hotel values in the 2009. As noted in the first article below, PKF Consulting now says that hotels starring 2009 with occupancies of less than 70% are likely to suffer more than a 48% decrease in NOI in 2009.

Combined with a 200 basis point increase in cap rates projected for the year, hotel values will decline even further. On the cap rate effect, please see particularly:

Hospitality Lawyer: Fortunes will be made . . . or lost . . . in the wake of The Financial Bailout Bill and the Panic of 2008. What happens AFTER the Bailout Bill . . .

Hotel Attorney on Hotel Cap Rates. What’s happening to hotel cap rates, values and financing?

To better understand how this all affects the hospitality industry, please see some other recent articles listed below:

Hotel bankruptcies, workouts and turnarounds: Hotel Lawyers on the TARP, the TALF, and the ugly. What does it mean to hotel owners and lenders?

Hotel Lawyer: Uh Oh! Now they are using the “D” word

Hotel Lawyer: New hotel data and revised predictions for 2009. Increased hotel loan stress, falling NOI and slumping values. It’s going to get worse before it gets better.

Hotel Attorneys with the latest “updates from the field”

Hotel Lawyers: How do we pay for this? And what happens next?

Troubled Hotel Loans: Turning point or just another ledge on the cliff before we go over the edge? Bad bank rescue and RTC-2 ahead?

Latest insights from JMBM’s Hotel Attorneys and PKF Consulting on what lies ahead for the hotel industry . . .

Fortunes will be made . . . or lost . . . in the wake of The Financial Bailout Bill and the Panic of 2008. What happens AFTER the Bailout Bill . . .

This is Jim Butler, author of and hotel lawyer, signing off. We’ve done more than $87 billion of hotel transactions and more than 100 hotel mixed-used deals in the last 5 years alone. Who’s your hotel lawyer?

Our Perspective. We represent developers, owners and lenders. We have helped our clients as business and legal advisors on more than $125 billion of hotel transactions, involving more than 4,700 properties all over the world. For more information, please contact Jim Butler at or 310.201.3526.

Jim Butler is one of the top hospitality attorneys in the world. GOOGLE “hotel lawyer” or “hotel mixed-use” or “condo hotel lawyer” and you will see why.

Jim devotes 100% of his practice to hospitality, representing hotel owners, developers and lenders. Jim leads JMBM’s Global Hospitality Group® — a team of 50 seasoned professionals with more than $87 billion of hotel transactional experience, involving more than 3,900 properties located around the globe. In the last 5 years alone, Jim and his team have assisted clients with more than 100 hotel mixed-use projects — frequently integrated with energizing lifestyle elements.

Jim and his team are more than “just” great hotel lawyers. They are also hospitality consultants and business advisors. They are deal makers. They can help find the right operator or capital provider. They know who to call and how to reach them.

Contact him at or 310.201.3526. For his views on current industry issues, visit

Contact Information