Hotel properties, particularly low-occupancy properties, are more likely to default on their debt service obligations as operating incomes dwindle and hotel values take a hit, according to a new study by PKF Hospitality Research.

The Atlanta-based hospitality industry research affiliate of PKF Consulting expects that in the case of full-service U.S. hotels there will be a 25% increase this year in the number of hotels that will be lacking the cash flow required to make their debt payments. PKF predicts that the average U.S. hotel will see revenue per available room (RevPAR) drop 9.8% in 2009. RevPAR was down 1.8% in 2008.

PKF forecasts that capitalization rates will rise 2.4% from 2007-2011. Over the same period, the researcher forecasts that hotel values will decline more than 35%. For 2009, PKF anticipates that hotel property values will decline 20.1%, following a 14.1% drop last year.


“The rise in cap rates, combined with the significant declines in hotel income levels, leads to these sizeable reductions in hotel asset values,” says John Corgel Ph.D., the Robert C. Baker professor of real estate at the Cornell University School of Hotel Administration and senior advisor to PKF Hospitality Research.

Despite such gloom and doom projections, the prevailing sentiment at the America Lodging Investment Summit in San Diego this week was positive. Few speakers talked of the negative numbers and focused instead on when the turnaround is expected to begin.

Hotel operators at the conference also plan to aggressively hike up their sales and marketing efforts and resources. Andy Cosslett, chairman of InterContinental Hotel Group said that his company had increased its worldwide sales staff by 30% “as a quick and effective way to shift business into our hotels.”

As for the PKF forecast of the potential for increasing default, the research firm arrived at its conclusions based upon an extrapolation of a historical study of 6,000 full-service U.S. hotels in its database, as well as data from Smith Travel Research.

Specifically, the PKF study looked at the historical relationship between declines in RevPAR and resulting changes in hotel profits for each year from 2000 to 2007. The sample was divided into two groups based on occupancy levels. Properties with an occupancy rate greater than 70% in the prior year were classified as high occupancy while properties with occupancy less than 70% in the prior year were classified low occupancy.

PKF found that in general even significant declines in revenues at high-occupancy properties resulted in a relatively small decrease in monies available to pay debt obligations.

On average, taking into account each year of greater than 10% RevPAR decline for each property, a 13% decline in RevPAR at a high-occupancy hotel resulted in an 8.6% decline in profits. This meant that debt service obligations were only covered 1.33 times, from 1.45 times prior to the revenue decline.

This should reassure lenders that most stable full-service hotels would still be able to generate enough cash flow to pay their mortgages, according to Mark Woodworth, president of PKF.

In the case of low-occupancy hotels, using the same criteria as for the high occupancy properties, the study found an average RevPAR decline of 16.3%, and average profit down 44.8%. In turn, the debt service coverage ratio fell to 0.80, from 1.45 times.

Considering that PKF’s forecast calls for a 57.2% average occupancy in the industry for 2009, it appears that many hotels will be in the low-performing category.

PKF anticipates that the RevPAR decline in 2009 will be the fourth largest annual decline in this industry metric since 1930. As well, the firm does not foresee any increase in RevPAR until the third quarter of 2010.

This decline, beginning in the third quarter of 2008, will make for the longest continuous period of falling revenues in the U.S. hotel industry in more than 20 years, according to PKF.

“Few hotel lenders have had to deal with such precipitous declines in revenues,” says Woodworth. “Therefore, they are unprepared to gauge the pending impact on the ability of their borrowers to repay their obligations.”