Commercial agents await the great hotel sell off, maybe, in 2010-11

Hospitality industry in the dumps

According to industry statistics, up to 10 percent of the nation’s hotels/motels are in serious trouble, and could be in bankruptcy or foreclosure within the next 12 to 18 months. That’s a potential inventory of 4,000 properties that could be up for sale or on the auction block in the next year and a half.

In an April 29 report by The Journal Record in Oklahoma City, the state has some serious hotel/motel issues.

The newspaper quoted a hotel broker: “Our hope is that you don’t see the market just flooded with foreclosed hotels, because it will drive down the values and is sort of a self-fulfilling prophesy,” said Holmes, chief operating officer of Oklahoma City-based HotelBrokerOne. “The more hotels you put on the market at bargain-basement sale prices, the more it drives down the value of the other loans. It’s a cascading effect you don’t want to have. ”

95 percent decline in transactions

One huge problem with the increased inventory is that the volume of transactions have seriously declined: Hotel and Motel Management stated that the industry saw a 95 percent decline in number of transactions from 2007 to 2009. Some regions saw a 50 percent drop in values. When industry experts were polled how long it would take for the market to rebound to 2007 levels, as a whole the group was not optimistic for a fast recovery, citing 5 to 8 years.

The sharp decrease in transactions leaves brokers with very few — if any — comps to use to value properties. And declining revenues just add fuel to the downward spiral in pricing. Valuation of properties and making it through the underwriting process remain serious concerns in financing deals, as with all commercial sectors.

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Commercial lending problems, of course

Add to the mix the scarcity of commercial lending right now, and you have a witch’s brew of problems.

In properties where the lender has ownership, deals seem to be easier to push through (which makes sense), as frequently the lender/owner will help finance the deal to get it closed. REO’s and short sales are expected to be a major source of hotel purchases in the next 18 months.

Cautious optimists

Some industry experts scoff at the idea that thousands of properties will flood the market in 2010, citing the fact that the first four months of the year have not seen the predicted deluge emerge.

These “cautious optimists” cite increased bookings in hotels for January and February of 2010, compared to the same month statistics for 2009. Despite higher occupancy rates and some operating revenues, in year-over-year comparisons, the transactions are not moving as quickly as hospitality insiders would like.

Investors with money to spend are slow to purchase right now. Many are sitting on the sidelines, waiting for the great deluge of hotels/motels forecast to hit the market in the next year and the drop in prices that would logically follow — that may or may not materialize.

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Have we bottomed out?

Some say with a 95 percent drop in transactions — how could we not have hit bottom? They are forecasting an increase in transactions as 2010 moves along, and eventually an increase in prices for sellers.