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Hotel Experts Anticipate ‘Day of Reckoning’ as Market Slides

Has the hotel market hit bottom? That was a subject of wide-ranging debate at the Midwest Lodging Investors Summit this week in Chicago, with most participants agreeing that the industry’s recession is likely to deepen further through the end of the year, and perhaps beyond.

Timing any market cycle is a precarious exercise, with tops and bottoms typically not confirmed for months and even years after the fact. Most experts insisted that visibility has never seemed as uncertain as it does now.

William Hanley, a partner and managing director with Vantage Hospitality Group LLC in Glen Allen, Va., predicted that the bottom of the market will be reached by the fourth quarter this year. “In the fourth quarter we’ll be comparing profits and operations to the fourth quarter of 2008, and those comparisons could begin to look favorable,” he said. “If we can say that we’re merely flat in the fourth quarter with year-earlier results, then we’ll have reached bottom.”

But in his next breath, Hanley acknowledged that his forecast was tied to consumer confidence, a difficult metric to measure. “Once consumer confidence returns, and I think it could by the end of the year, then we can uncircle the wagons in our industry,” he said.

California hotels in trouble?

Morris Lasky, the CEO of Lodging Unlimited Inc. in Chicago, who is raising a $350 million hotel acquisition fund, endorses Hanley’s notion that the bottom will be reached this fall. He revealed that he’s been in negotiations with lenders poised to foreclose on hotels in the fourth quarter, when a wave of asset takeovers is anticipated.

“Lenders have been holding off, hoping that industry conditions would get better. They haven’t,” Lasky said. “We could see close to half the hotels in California go back to lenders. When the market gets that bad, then you can say that we’re at the bottom. This foreclosure phenomenon is not a matter of if, only when. And the moment is getting closer.”

Many other observers at the conference believe that the ultimate day of reckoning in hotels is more likely to fall later in 2010. “The industry still isn’t feeling enough pain yet,” said Ted Mandigo, a hotel consultant based in Chicago. He believes the bottom will not come until “large numbers of banks with hotel loans have the keys handed back to them and are forced to start writing checks each week instead of receiving checks from the borrower.”

In a Monday afternoon session titled “The Market for Acquisitions,” participants agreed that most dealmakers will remain on the sidelines until a signal that the current cycle has reached its nadir. But they seemed mystified in trying to forecast that moment in time.

“I don’t think we’ve come remotely close to bottom yet,” declared Andrew Strasser, a founding principal of Abacus Lodging Investors LLC of Chicago.

Dilemma: Timing a purchase

A frustrated Michael G. Medzigian, chairman and managing partner of Watermark Capital Partners LLC of Lake Forest, Ill., said that “as many hotel cycles as I’ve seen I’ve never seen one like this before. This is way worse than it ever was in the recession of the early 1990s, and I don’t think the market has reached bottom yet. Investors in the meantime are asking, ‘Why should I buy a hotel before I know what the future looks like?’”

Many economists believe that gross domestic product will begin to start growing again in the U.S. in the third and fourth quarters this year, usually a harbinger of improvement for the hotel industry. But experts aren’t so sure this time.

Unemployment is expected to keep falling—even in the face of a rise in GDP—well into 2010. Hotel performance is looking increasingly like a lagging indicator in a future economic turnaround. “Positive job growth will be the ticket to recovery,” asserted Michael Shindler, president of Four Corners Advisors Inc. in Chicago.

Acquisition activity is bumping along at levels not seen for nearly a decade. Most conference attendees believe that the market must decisively reach or pass bottom before dealmaking breaks out in earnest again. But most of 2010 could remain quiet, they said. “We could see good deal flow again in 2011,” predicted John Jameson, managing director of hotel brokerage Molinaro Koger Inc. in Chicago. “But then, it’s all speculation at this point.”

When asked about the timetable for a recovery in hotel occupancies and rates, Kirby Payne, president of HVS/American Hospitality Management Co. in Tiverton, R.I., conceded that “I have no idea. I just make up answers to questions like that.”

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