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Inhospitable Environment

Revenues in the hotel sector took a free-fall in 2001, and the effects of the industry slowdown are showing up in the number of delinquent hotel loans. Loan delinquencies rose from $697 million at the end of November to $955 million at the end of March, according to figures compiled by Standard & Poor's (S&P). S&P tracks conduit deals, including commercial mortgage-backed securities.

The 27% rise in late loans is no surprise to industry observers. Hotel properties already were hurting from the recession when the Sept. 11 terrorist attacks sent the industry into an unprecedented tailspin as convention and leisure business dropped dramatically. San Francisco-based PKF Consulting reports that revenue per available room (RevPAR) for hotels with more than 500 rooms declined 19% at year-end 2001 compared with year-end 2000.

Due to the decline in occupancies and revenues, hotel owners are having more difficulty paying taxes, vendors, utility bills — and loans, says H. Keith Thompson, a principal at Thompson, Calhoun, Fair, an Atlanta-based hotel brokerage.

Thompson has noticed a big increase in foreclosed properties over the past few months. His firm is marketing 25 foreclosed properties, which he estimates is an increase of about 50% compared with the end of the fourth-quarter 2001.

“I don't think it's peaked yet,” Thompson says. “I don't think it will peak until the fourth quarter of this year or the first quarter of next year.”

Tom Ives, a senior managing director in the Atlanta office of Insignia/ESG Hotel Partners, notes that “pockets of the country have become really depressed.” Ives and Thompson agree that owners in tertiary markets are taking the biggest revenue hits, particularly owners of properties in the secondary markets of Texas and Florida. These are markets that were already overbuilt, and owners of smaller properties of 100 rooms or less don't have the deep pockets needed to ride out an economic downturn, notes Thompson.

March 2002 $955 million
November 2001 $697 million
August 2001 $325 million
June 2001 $.34 million
December 2001 $.18 million
Source: Standard & Poor's

Although Ives says the increase in delinquent hotel loans is proof that the economy is taking its toll on many hotel owners, he warns against developing a dire forecast for the industry.

CMBS financing became popular only six years ago, and the rise in delinquencies is partly a result of a large number of loans coming due at the same time. And he adds that some hotel-sector forecasters are predicting an industry-wide increase in RevPAR by the end of the year. “I think the mood has changed, and people are much more optimistic today,” he says.

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