Morris Lasky doesn't mince words when discussing the fragile state of the U.S. lodging market, which is burdened by a deepening recession and a raft of thinly capitalized hotel owners. “It's amateur hour for a large part of the hotel industry,” declares the CEO of Chicago-based Lodging Unlimited, a hospitality consulting and management firm he founded in 1970.

A 50-year veteran of the hotel industry, Lasky has lived through several real estate cycles. This recession is shaping up to be particularly bad, but it also promises to bolster his business as a hotel turnaround specialist. To date, his company has rescued at least 300 hotels. The stock market meltdown, the $700 billion bailout of financial institutions by the federal government and a weak economy have led to a pullback in business and leisure travel — all the elements of a perfect storm.

“We're seeing a lot of the newer investors who have no skills in the hotel industry, who have no financial strength. They're going to be dropping the ball. It's going to be a little bloody,” predicts Lasky. Since its founding, Lodging Unlimited has undertaken assignments totaling more than $7 billion in real estate assets and 50,000 hotel rooms.

Lasky's shop already is fielding calls pertaining to bankruptcies and foreclosures. “This is early on, but I think we are going to see that get bigger and bigger as we head into the first and second quarters of next year.” As part of his due diligence process, Lasky walks each property. In addition to his consulting work, Lasky plans to launch a $300 million fund, Lodging Opportunities Group, to buy underperforming hotels.

Lowered expectations

Ironically, on the same day that Wall Street traders cheered an 889-point rally of the Dow Jones Industrial Average, PKF Hospitality Research on Oct. 28 revised downward its forecast for 2009. Unlike other commercial property types, the hotel industry essentially has 24-hour leases in the form of overnight stays and is particularly susceptible to changes in the economy.

The latest forecast now calls for revenue per available room (RevPAR) to drop 4.3% in 2009, primarily due to weakening demand. Less than two months ago, PKF forecast that RevPAR would fall only 3.2% next year.

“The level of volatility in the marketplace is something we really haven't seen since the post 9/11 period,” says Mark Woodworth, president of Atlanta-based PKF Hospitality Research. “As a consequence, expectations of what market behavior is likely going to be going forward has shifted quite dramatically over the last 30 to 45 days.”

PKF also has revised downward its forecast for 2008. RevPAR is now projected to drop 0.2% in 2008 compared with earlier estimates of a gain of 0.8%. “The view that I buy into is that we're going to look back and realize that the recession began in the summer of 2008,” says Woodworth. “We're sliding on the slope until well into the second and third quarters of 2009.” To that end, lodging REIT shares also are sliding. Total returns year-to-date through Oct. 27 were down a whopping 66%.

Pressure points

The average U.S. hotel is projected to suffer a 7.9% decline in profits in 2009, reports PKF. That places big pressure on hotel owners and operators. “Watch your expenses like a hawk because we're not going to see new sources of revenue surface,” says Woodworth. “Given that profits are a function of how much revenue you take in and how much cost you incur, the focus in 2009 needs to be on the cost side of the business.”

Obtaining debt financing to buy hotels or build new ones will be much more difficult during the coming year, but not impossible, says Steve Hanover, head of PKF Capital's Hotel Finance Program. With the CMBS market virtually dormant as a result of the global credit crisis, community banks as well as preferred equity and mezzanine lenders are stepping up to the plate, explained Hanover in a news release. While the cost of funds is going up, loan-to-value ratios have dropped to a conservative range of 50% to 65%.

Lasky strongly advises borrowers to develop a rapport with their lenders and make them immediately aware of any potential problems in repaying their loans. “If you suspect a problem coming up and you don't talk to the lender, it will be more devastating when you get there.”

Contact Editor Matt Valley at matt.valley@penton.com.