Editor's note: This story is part of a new series from HotelNewsNow.com, in which we address topics related to the tumultuous conditions of the hotel industry. Also see the resource, "Hotel real estate terms you need to know."

REPORT FROM THE U.S.—It’s like a boulder rolling down a hill gaining speed, and the people at the bottom can see it coming.

In the case of the hotel industry, it’s the number of loan defaults and hotel foreclosures that is quickly increasing. Many of the defaulted loans were originated between 2005 and 2007, when loan underwriting standards went out the window. More are on the way.

Trepp LLC, a provider of commercial mortgage-backed securities (CMBS) and commercial mortgage information, tracks hotel loans, including those in CMBS pools. There are about 3,800 hotel CMBS loans, according to Trepp. Of this amount, about 2,300 were done in 2006 and 2007. Almost none were done in 2008.

“That’s where so much of the focus is at,” said Mark Woodworth, executive VP of PKF Consulting. “That was the peak of the cycle when the cost of debt was at the lowest point and contributed to high values.”

In January 2008, 0.48 percent of all hotel loans in the CMBS pools were delinquent, according to Trepp. In January of this year, the percentage increased to 1.72 percent. This month, it increased to 4.24 percent.

In January 2008, 0.2 percent of the hotel loans in the CMBS pool foreclosed. In January this year, that percentage increased to 0.65, and in July, it increased to 1.22 percent.

Out West

What’s going on in California mirrors what’s going on in the rest of the country, said Alan Reay, president of Atlas Hospitality. In the Golden State, the number of hotels in default or foreclosure increased 125 percent in 60 days (mid-May through mid-June)—31 hotels were foreclosed on, and 175 are in default. San Bernandino County leads the state with 19.6 percent of them. Riverside County follows with 16.1 percent.

Nonfranchised hotels account for a disproportionate number of foreclosures—87 percent. However, franchised hotels make up 59 percent of default properties. As the economy worsened, it affected all properties, not just smaller hotels in tertiary markets. (Read “California to see record number of hotel foreclosures.”)

Mark Woodworth

Defaults and foreclosures continue to spread across all segments of the market throughout the country, Reay said.

“It started with independent, nonflagged hotels in tertiary markets, but the past 60 days, it’s been branded properties in primary locations,” he said. “Every hotel, unless there’s no debt, is struggling right now. Full-service hotels or business hotels are getting hit the hardest. The economy segment isn’t getting hit as hard, but it’s still getting hit. New York, resort locations, Arizona, Florida, Nevada, the Caribbean and Texas are all taking a hit. The heart of the Midwest, where we didn’t see a big increase in rates, might not get hit as hard.”

Government regulators are giving lenders more time and leeway, Reay said.

“It’s a slower process than what we saw in the 1990s,” he said. “It’s denial and delay. Lenders are doing whatever they can to make sure they don’t take properties back. But that only pushes the problem back. At this stage, we’re seeing a number of owners walking away and closing hotels.”

Walking away

The 258-room W San Diego is a prime example. Sunstone Hotel Investors, a REIT, gave the keys of the hotel back to the lender, Centerline Servicing. The financing for the hotel was part of a CMBS pool. Sunstone paid US$96 million three years ago, and the debt was US$60 million. Sunstone stopped paying the loan two months ago.

(Read “Sunstone to forfeit W San Diego.”)

“Sunstone couldn’t pay debt service, and the hotel wasn’t worth what they owed,” Woodworth said. “They couldn’t engage the lender in any discussion to restructure the loan to make the situation better for all involved only because CMBS laws say you can’t restructure the loan until it’s become delinquent. This will contribute to problems in the industry.”