The fallout from the great recession can be seen on almost every Main Street in America in the form of empty storefronts to abandoned and foreclosed homes. One area of the real estate market that has been the hardest hit by the real estate collapse has also received the least amount of attention in the mainstream media. More than any other class of commercial real estate, hotel and motel owners have seen the worst effects of the real estate downturn nationwide. While it is estimated that commercial property prices on average have declined 40% from their 2007 peak, the drop in prices for hotel and motel properties has reached a staggering 50% on average. I can testify from personal experience working as a commercial loan modification specialist with hotel and motel owners that in many areas of the country the drop in prices has been substantially greater than 50%.
Here are some mind boggling statistics about the hotel and motel real estate market:
- U.S. hotels are now seeing a record low occupancy of 45.1%. According to Smith Travel Research this is the lowest January rate since they began tracking statistics in 1987. The fact that hotels are now bringing a much lower amount of income has forced many property owners into foreclosure.
- In the past two years 40,000 U.S hotel employees have been laid off.
- According to Fitch Ratings hotel values have fallen by 50% from their peak in 2007. This has severely impacted the ability of hotel and motel owners to refinance their commercial loans which are coming due. Hotel owners are now finding it almost impossible to sell their hotels for what they owe on their mortgages.
- According to Trepp, a company tracking commercial real estate loans, securitized hotel loans reached a delinquency rate of 15.7% at the end of February. These securitized mortgages represent one fourth of all commercial hotel loans.
- 500 hotels across the U.S. have already been foreclosed upon by their lenders since 2008. However, most of these hotels have continued to stay in business.
For example, a client of mine purchased a flagged hotel in central Florida for 4.25 million dollars in 2005. A recent bank ordered appraisal came in at only 1.5 million dollars. The client currently has a loan on the property for 3.2 million dollars. The main reason for the decline in the value is the fact that occupancy has steadily dropped by 20% year over year for the past three years. Occupancy in 2007 was a solid 60%, occupancy in 2008 fell to 40%, occupancy in 2009 was only 20%. It goes without saying that the hotel owner was unable to continue to pay on his loan on the cash flow being generated on a 20% occupancy level. If there is any good news for hotel owners experiencing this kind of financial distress it is the fact that banks are not eager to take back possession of hotel properties. Managing and operating a hotel business is not a realistic option for banks whose main area of business is lending money. Furthermore, it is estimated that a repossessed hotel that has no management in place automatically loses about 50% of its value. In these circumstances, the best way for a bank to guarantee a loss on their investment is to repossess the property.
In fact, banks are more willing than ever to negotiate with hotel owners who are facing financial distress because of a drop in business and the overall recession.
Photo: Kevin Dooley