Bill Hoffman insists that he is not a prophet of doom, but some hotel industry executives might beg to differ. The founder and CEO of Trigild, a San Diego-based receivership and loan recovery specialist, predicts that the mortgage default crisis which has sunk many hotel owners will get much worse over the next two years.
The delinquency rate on CMBS hotel loans 30 days or more past due reached 18.45% in May, up from just 3.15% a year ago, according to Trepp LLC. Hoffman says lenders believe that 40% of all hotel mortgages originated in the last three to five years are in default or about to go into default.
“An improving economy is not going to be enough help, quite honestly,” says Hoffman, who has served as a court-appointed receiver on more than 1,500 commercial real estate assets. “Part of the reason is that values on hotels are going to remain very low. They are going to get worse. They are down 40% to 50% now [from their peak], depending on what part of the market you look at. It's much worse in some other cases.”
The majority of troubled CMBS hotel mortgages originated over the past three to five years were short-term loans, says Hoffman, and will soon mature. “It's a pretty safe bet that virtually none of those hotel loans can be refinanced.” His comments came during a panel discussion at the recent National Association of Real Estate Editors convention in Austin.
Opposing view
Is Hoffman's assessment of the performance of the U.S. hotel market too negative? John Keeling, a fellow panelist and executive vice president at Houston-based Valencia Group, certainly thinks so. “Have you ever known an optimistic policeman?” Keeling asked the audience of journalists. “Most policemen are pretty cynical. They deal with criminals every single day. Their point of view is that everyone here is a potential criminal.
“I'm reminded of that when I listen to Bill talk about the person whose job it is to clean up the trash (failed hotel properties) in Southern California, one of the four worst lodging markets in the country. The others include Phoenix, Las Vegas and Florida. Sometimes you can get so overwhelmed by what you do that you lose a little perspective,” adds Keeling.
Launched a decade ago, The Valencia Group began by developing Hampton Inn and Homewood Suites projects before branching out to develop its own upscale brands, Valencia and Sorella. The company operates full-service, independent hotels. While Keeling acknowledges that lenders are steering clear of ground-up development with the exception of HUD loans for a Motel 6 or a Microtel, that's not the case for existing product.
“We are seeing more and more lenders opening up and providing debt to hotel projects, but not for new builds.” They provide debt for existing properties with lower loan-to-value ratios, require personal guarantees, and sometimes require cross-collateralization, says Keeling. (Borrowers today can expect an 8% interest rate to refinance their properties.)
Some $1.4 trillion in commercial mortgage debt will mature by 2013, Keeling notes. About 65% of loans coming due by that time will need some type of equity infusion in order to get refinanced, he says, adding that there are billions of dollars on the sidelines waiting for the right opportunity. The lenders will likely renew the remaining 35% of loans coming due in order to recoup as much as possible on their investments.
For its part, the Valencia Group isn't remaining idle. The company has entered into joint ventures to reposition existing hotels as four-star Hotel Valencia or Hotel Sorella properties in a number of major cities including Chicago, New York, Washington, D.C., Miami and San Francisco.
With the exception of the Chicago project, the rest won't come on line until 2011 or 2012. “We think that's a good time to come back into the market with fresh new product that competes with the heavily branded properties,” says Keeling.
Clearly, Hoffman believes the glass is half empty for hotel owners. Keeling, on the other hand, takes the view that it's definitely half full. You've got to love developers.
Contact Editor Matt Valley at [email protected].