GRAPEVINE, Texas—As the wave of distressed hotel assets in the United States moves west, special servicers and other experts speaking at the ninth annual Fishing for Solutions: Servicing Hotel Loans conference believe there is still a long way to go before the situation gets any better. And don’t assume the only distressed hotels are ones that were financed in 2005 or after.
Conference speakers said the new trends in special servicing are developing quickly and changing often.
“The biggest change is geography … the westward movement of the portfolio,” said Curt Spaugh, senior VP-asset management of Helios AMC, a special servicing and investment management company serving the commercial real estate industry. “It started in the Northeast, now it’s Phoenix, Las Vegas, Southern California. It mirrors the RTC days.”
The federal government established the Resolution Trust Corporation in the 1980s to deal with the savings-and-loan crisis.
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| Jackie Brome of CapMark Finance. |
Clark Rogers, senior VP of KeyBank Finance in Kansas City, Missouri, agreed the movement has picked up, but there are areas that are immune, including the Pacific Northwest, Kansas City and Minneapolis, Minnesota.
“Just like the last (downturn), it started in the east and is moving west,” said Jackie Brome, senior VP, director of asset administration for Capmark Finance. “The only place I see immunity is the Pacific Northwest.”
Rogers said special servicers have become more willing to listen to good sponsors as they look for solutions to the growing number of hotel defaults.
“We’re doing more extensions, but it’s a situation by situation approach,” Rogers said. “Each deal has its own life, and some of them don’t have any hope.”
Panelists said that government programs such as Public-Private Investment Program and the Term Asset-Backed Securities Loan Facilities program were supposed to create some hope but have failed to live up to expectations.
“It’s gotten off to an anemic start,” Rogers said. “I believe in the free market. You have to get this stuff written off, and you have to come to a realization of price. We haven’t gotten there yet.”
“The programs have set up a smoke screen to make people feel better,” Brome said. “We need to allow the market to correct itself and allow it to find the bottom.”
The bottom could be determined when lenders place a large number of distressed hotels on the market. That would mean lenders are exercising the covenants of loans rather than the current philosophy of extending loans and hoping something happens to avoid defaults.
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| Steve Hanover of Situs Companies |
Steve Hanover of Situs Companies, the only special servicer working with the Federal Deposit Insurance Corporation, said 106 banks have failed this year, and the distressed hotels on the books of those failed banks have to be worked out.
“We expect over the next few weeks 1,300 loans to service coming to us from the federal government,” Hanover said.
He said he expects the total number of failed banks this year to reach 120, and to be double that in 2010.
Several panelists agreed they thought a flurry of defaults was going to happen in the industry as early as 2007. However, that didn’t occur, and now it appears that the industry is on the precipice of some serious default levels.
“I was expecting it to happen much quicker than it did,” Hanover said. “We’re going to see a lot higher defaults in the next 12 months. If you look back 12 months, the highest default class was medical, second highest was multifamily. Hotels were third. Since then, hotels have caught up, and there’s been a major shift.”
Luxury amid the recession
The other major shift has been the number of luxury properties that have been decimated by the recession. During previous downturns, luxury hotels by and large escaped serious problems, but that’s not the case this time around.
Brome said one big reason for that is that luxury properties must fulfill lofty brand standards during a rough economy,
“I don’t see that the brands are going to bend much. I just don’t get that sense,” she said. “This time we’re seeing more upper-end problems because they have to run things by the book.”
Hanover said the sickly state of the airline industry also has contributed to the demise of the upper end.
“Reduction of lift capacity is a major, major issue because it directly feeds into occupancy,” he said. “The airline industry is an adjunct into the hotel industry. It’s the lifeblood of the corporate traveler, the business traveler.”
Still, banks have been reluctant to assume control of hotels, particularly at the luxury level, unless it’s absolutely necessary. Panelists said lenders have learned that the operations of a hotel can be difficult and expensive.
“Hotels are more of an operating business than commercial real estate,” Rogers said. “It reacts immediately; it’s that operation piece as a workout person that you have to manage.”
Michael O’Hanlon, Capmark's senior VP and director, agreed luxury hotels have seen better days.
“We are seeing some large luxury hotels that I don’t think anyone in their wildest dreams thought would go to special servicers,” O’Hanlon said.
The entire situation boils down to when hotel assets eventually are put on the market, it’s going to be a situation in which there are few willing sellers.
“If they’re not distressed, we’re not advising anyone to sell,” said Rick George, a principal with HREC Investment Advisors. “There’s no reason to.”
Added Adam McGaughy, executive VP with Jones Lang LaSalle Hotels: “If we tell them not to sell because it’s not distressed and they still want to go on the market, it’s distressed—we just don’t know about it.”
