2 February 2009
Hotel Lawyers with the pulse of the hotel industry from ALIS. Mark Woodworth of PKF Consulting shared his latest analysis of the hotel industry with us, as well as his slides from the ALIS conference. The picture is not pretty. Mark says, that if you’re waiting for the recovery, the key word is “PROTRACTED.” Here are the details.
A deteriorating situation getting worse
Mark Woodworth views employment as one of the best measures of the economy’s health. Conversely, unemployment shows the economy’s weakness. The situation is pretty bad and has been getting worse. The following slide shows actual and projected unemployment and how the forecasts have worsened from August to October and now January 2009.
The experts from PKF consulting are projecting that it will take 15 quarters for employment to return to its prior levels. If true, this would be one of the worst unemployment periods since 1979, as shown in the following slide.
When will the hotel industry recover and what are the turning points?
Here is a graphic illustration of how PKF sees the economic recovery in terms of GDP, income and employment:
Loan delinquencies growing
We can only guess where hotel CMBS delinquencies will go from here, but here is Mark’s chart on results to date:
Protracted hotel supply-demand disconnect, declines in occupancy and ADR, and record declines in NOI
This leads to protracted declines in occupancy and ADR, with ADR recovering only in the second quarter of 2010.
“Explosion” in hotel cap rates
PKF Consulting is forecasting an “explosion” in cap rates for hotels, up by 210 basis points from today through 2010 to 9.7%.
Falling hotel values
Falling NOI and exploding cap rates lead to a projected decline in hotel values of more than 20% in 2009, with no significant improvement in values until 2012.
Low occupancy hotels (less than 70%) will experience extraordinary value declines
Although PKF Consulting is projecting a national average decline in RevPAR of 9.8% for 2009, the impact of RevPAR declines on NOI will depend upon the occupancy level of the hotel as it enters 2009. The following chart shows PKF’s projections that high occupancy hotels (with occupancy greater than 70%) will have NOI declines of 8.6%, while hotels with less than 70% occupancy will suffer a 44.8% NOI decline!
Less than 30% of all CMBS Hotel loans since 2005 have LTVs over 70%
So where does this leave lenders and borrowers in terms of “loan to value” or “LTV” ratios? This final slide suggests that at the end of 2008, less than 20% of the CMBS loans originated since 2005 still had an LTV greater than 70%.
Let me turn that around to say it differently: At the end of 2008, more than 80% of the hotel CMBS loans have less than a 70% LTV, and in 2009, the experts are predicting record RevPAR and NOI declines with an “explosion” in cap rates of 210 basis points . . . and no improvement in value for some time. This does not bode well.
Hotel bankruptcies around the corner?
Hotel bankruptcies have already begun, but we see the flow speeding up as lenders and owners “see the writing on the wall.” There will be tremendous opportunities here for someone.
To better understand how this all affects the hospitality industry, please see some other recent articles listed below:
This is Jim Butler, author of www.HotelLawBlog.com and hotel lawyer, signing off. We’ve done more than $50 billion of hotel transactions and more than 100 hotel mixed-used deals in the last 5 years alone. Who’s your hotel lawyer?
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