CHICAGO — Although real estate fundamentals and valuations in the U.S. hotel sector are clearly on the rise, the overhang of distressed properties remains significant.

According to New York-based Trepp LLC, the percentage of CMBS hotel loans 30 days or more past due in June stood at 13.87% — second only to the multifamily delinquency rate of 16.48%. By dollar volume, delinquent CMBS hotel loans totaled $8.4 billion in June.

The good news is that the delinquency rate for CMBS hotel loans dropped 150 basis points from May to June. Over a 12-month period ending in June, the percentage of loans 30 days or more past due has fallen from 19.01% to 13.87%.

Against that backdrop NREI moderated a panel discussion, “Cleaning Up Distress,” at the Midwest Lodging Investors Summit in Chicago on Tuesday.

Several hundred hotel industry professionals descended on the Hyatt Regency McCormick Place for the three-day event hosted by Lodging Hospitality magazine, NREI’s sister publication. What follows are some sound bites from the panel discussion on hotel distress in the Midwest.

Jeff Schrader, director of new business development for Kinseth Hospitality Cos., commenting on the deleveraging challenges ahead for the hotel industry:

— “The real conundrum coming up for hotel owners is going to be refinancing. For example, let’s say a five-year-old asset that has a mini-perm loan all of a sudden has a lot less revenue flowing through the hotel. When the refinancing is about to take place, the owner is going to be asked to come to the table with more equity. A negotiation is going to have to take place, or else the property will be foreclosed upon.”

Kevin Gallagher, senior vice president of business development for Prism Hotels & Resorts, commenting on the growing pressure on hotel franchisees to undertake a costly property improvement plan (PIP) in order to maintain brand standards:

— “We see the overdue PIP problem coming to a head very, very soon. It’s not going to take much to put a lot of hotels into a real skid.”

David Sangree, founder and president of Hotel & Leisure Advisors LLC, commenting on the driving force behind the pricing gap between coastal markets and middle America:

— “There is no question the gateway cities have always had higher [hotel asset] prices than middle America, but the spread of prices to me is wider than it has been historically primarily because we have these REITs that have so much capital to invest. It seems like most of them are focusing on the coasts. So, it’s a case of a lot of capital chasing a relatively small number of assets.”

Bruce Blum, a partner with the Chartres Lodging Group, challenging the assertion that the large amount of hotel data available to investors today makes their job easier than in the past.

— “We like to say that hotel investing is not for choir boys. In this industry you have to be very, very careful. You have to really know what you are doing, and you better be really good at it. Don’t get confused and think that it’s real estate — because it’s not.”

David Sangree of Hotel & Leisure Advisors commenting on the challenges facing appraisers in valuing distressed hotels today:

— “There definitely are a lot of assumptions and estimates that an appraiser has to make in considering who might be the buyer of that asset. We’re doing a lot of work right now for the FDIC because it has taken over quite a few banks, and the banks have quite a few distressed hotel assets on their books. These assets are probably not the types of hotels that REITs are going to be buying because they are not in the gateway cities. It’s a challenge to say how low of a value is reasonable for a particular asset when it could be an asset that needs some renovations, but still is serving its purpose.”

Bruce Blum of Chartres Lodging commenting on how deferred maintenance can drag down the performance of a hotel property over time:

— “It’s very difficult to raise rates in a lot of these hotels that haven’t had any capital put into them for years. When you look at the forecasts by the prognosticators, they continue to take down that portion of RevPAR that is attributable to rate. We see full-service branded hotels in major markets that haven’t been renovated in six or seven years, and in some cases they have been running 85% occupancy. It’s a real issue, particularly for properties that will need major renovations in order to transact. The debt markets don’t like to have to underwrite major renovations.”