GRAPEVINE, Texas—The U.S. hotel industry has been able to stave off a large number of loan defaults so far, but experts at the 8th annual Fishing For Solutions-Servicing Hotel Loans conference aren’t optimistic that it will be able to continue much longer.
“I want to emphasize how quickly this thing will come upon us,” said Steve Van, president and CEO of Prism Hotels & Resorts, and the conference’s founder.
Van likened the previous situation in the hotel industry to seeing a thunderstorm in the mountains—you could see the rain building, the creeks rising and the eventual flood. However, the current situation for the hotel industry is more like the Trinity nuclear test site in New Mexico.
“There’s a flash of light, then you see the sound wave coming and houses start to disintegrate,” Van said.
Panelists throughout the first day of sessions at the Gaylord Texan Resort and Convention Center told the audience that communication is the key to making any potential default a smooth process.
“The importance of taking proactive action can’t be overstated,” Van said.
He said that by being proactive, the processes of entering default, enduring default and emerging from default become seamless. Van said the early signs of a typical default include a property stopping maintenance as early as 18 months before the default takes place, and cutting the sales staff 12 months out. However, he said that with the current economic environment, that timeframe could shrink to six months.
“Any of those are red flags,” Van said to the 130 attendees, most of which were special services from the lending community and hotel brokers. “But the big one is if you stop getting financial statements [from the hotel]. There’s a reason for that. If there’s a default on the flag, there’s a reason for that. Don’t ignore them. It’s a compressed time frame.”
The opening session also featured discussion about the current environment that will fuel defaults down the road.
Tom Corcoran, chairman of the American Hotel & Lodging Association and chairman of FelCor Lodging Trust, echoed Van’s comments about communication.
“As we face these in what I consider a very difficult environment, it’s important that people talk,” he said. “Out of these cycles, most of us have found a way to make something out of it. That’s why most of us are here—to make something of it.”
Corcoran gave several descriptors of the current environment—including “ugh” and “it sucks”—and expects it to get worse before it gets better.
“Most of us expect the rest of 2008 to be negative [revenue per available room] and 2009 to be negative RevPAR,” Corcoran said, adding that what is most disconcerting is that forecasts get worse each month.
“I don’t think we’ve reached a point where we’re confident [in the projections],” he said. “Most of us believe it’s a little bit of a crap shoot.”
However, Corcoran said it could be worse, as it is for the airline, auto and home building industries.
“It doesn’t seem that this cycle has gotten nearly out of whack as some of the other cycles I’ve seen,” he said. “This one, hopefully, with the right kind of underwriting, won’t be as painful.”
Corcoran said the current climate isn’t very good.
“October clearly was a bad month,” he said. “October was a big surprise to most of us, how deep it was.”
The first thing that’s going to have to come back is the confidence, according to Corcoran.
“I’m not hearing of a lot of good deals yet,” he said.
Bobby Bowers, senior VP for Smith Travel Research, said October was the sixth month of negative RevPAR movement in 2008, but the biggest issue coming out of the month is the decline in ADR.
“Even though there are stretches in there where you have negative occupancy growth you can still have some fairly strong room rate growth,” he said. “You’ll see that room rate slow down as we move into the last part of the year.”
Corcoran said now that the election is over, “people are going to focus on what we need to do to turn around the economy.”
He said challenges for the hotel industry include the risk of terrorism, the visa program and energy costs.
Corcoran also said a big issue for the industry with Barack Obama winning the presidential race is the impact of unions.
“One issue that we’re nervous about is the Employee Free Choice Act or Card Check neutrality issue,” he said. “It permits employees at any service business to unionize, and it takes away the right for secret ballot.”
During the presidential campaign, Obama said he supported the Act. Corcoran said there are indications that the Obama camp could present alternatives to the Act, so its passage is not a foregone conclusion.
“I’m optimistic that as time goes on we will have seen we’ve got a few more gray hairs, but we will come out of it just fine,” he said.