It has been amazing to me how the hotel industry only seems to look back to try to project the future. The past has almost nothing to do with where the industry is going. At the Americas Lodging Investment Summit 2008, John Arabia and I talked about whether revenue per available room for all of ’08 would be negative 1 percent or flat. It was astonishing to us that anyone could think RevPAR would be materially positive. We also had no question in our minds that ’09 would be negative. The issue was simply that the capital markets drive the economy and the economy drives the hotel industry. People in the hotel industry ignore, and generally do not understand, the capital markets.
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Joel Ross
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In spring of ’07, several of us involved in the capital markets business, not the hotel industry, discussed which week the financial markets would collapse. All of us grownups involved in capital markets knew that what was happening with commercial mortgages and residential mortgages was insane and would all come crashing down very soon.
If you want to know where the hotel business is going, you need to look at the bond market and what is happening in the capital markets generally. What happens with the Troubled Asset Relief Program is going to determine when RevPAR turns up, not average daily rate or anything else directly related to hotels. When TARP is fully implemented and the bad bank and related government programs to fix the banking system are in place, there will be hope that six months later the economy may start to stabilize and turn slightly up.
Various recent articles predicting that things will be better after midyear or that banks will begin lending to hotels again after June are ridiculous. There is no question that the government is going to force banks to lend again, but the hotel industry will be one of the last places that occurs because the industry will be suffering the worst downturn since 1932 and there will not be the credit history to justify many loans.
Anyone who built or bought a hotel starting in early 2005 no longer is the economic owner of that asset. Your equity is long gone and will not be back for at least seven to 10 years. All real estate is going through a massive reset of cap rates by 25 percent to 40 percent or more. In addition, hotel net operating income will be nil or negative for 2009, so no NOI multiplied by high cap rates of 11 percent to 12 percent will mean the value of most hotels will decline by 40 percent or more. That also is the value decline most knowledgeable experts think all real estate will experience and hotels will decline more than any other asset class. Development is dead for many years. Why would you build a new hotel when you can buy one for far below replacement cost and have no development risk? To do so would be stupid unless it is funded entirely by the government and you do it for the development fee alone.
Right now an investor can buy the super senior tranche of a securitized pool for an unlevered yield of 15 percent or more. Performing single-asset senior loans on very good cash-flowing nonhotel properties can be bought for 11 percent or more unlevered yield. So why would any lender be so dumb as to make a loan on a hotel? The answer is only if they are dumb.
If you own a good nonhotel cash-flowing property today and want to borrow, the terms are 50 percent loan to value, with LTV far below what the owner thinks it is, along with a 2 percent fee up front, 9 percent rate and 2 percent exit fee.
Most good appraisers are telling banks and borrowers on all property types that there is no number they can assign today that has any reality. There is no transaction market so there are no good comps. There is such dislocation in the credit markets that there is no way to determine the right discount rate. The economy is so bad and the government fix so uncertain that there is no way to come close to projecting rents. Investors who are buying foreclosed assets or notes with the intent to foreclose are paying 10 percent to50 percent of the outstanding loan amount, or land value only, for assets. Most sophisticated investors now will not pay for any assumed NOI of a hotel because it is assumed there will be no NOI in 2009 and maybe 2010. That probably strikes many readers as crazy, but it is actually the right valuation.
Residential land in California and many other areas now sells for 50 percent of the cost of the in-place infrastructure, and the land is valued at zero or less. Major office buildings in New York with minimal vacancy are valued at 60 percent of what they were at the peak.
Forget everything you used to know, or think, about value or borrowing--it is completely irrelevant. This time we are truly in a new world, and it is never going back to where it was. This is not a cyclical dip; it is a complete structural change in the way financing is going to be done, and that means values are materially decreased for at least the next 10 years. At a panel I recently ran composed of several of the top executives in Wall Street and banking, not one had any idea what the new lending for real estate will look like. It has not been formulated yet.
You need to go into ultimate survival mode and you need to quickly figure out how to rework your loan. It will very likely go into default this year. Talk to your lender before the lender comes calling on you. Go with a proposed restructure of the loan.
