March 8, 2009 - Like an unwelcome guest, the recession is starting to vandalize the financial returns of local hotels. The hotel industry in Wichita and nationally is reeling from the twin scourges of a slowing economy and the credit crunch.

That dumps the hotel business into the same mess as other forms of commercial real estate -- and similar in many ways to what's happened much more visibly in the housing market.

Falling revenue in January, plus plenty of doom and gloom from national forecasters, has left some local hoteliers anxious.

"Where is the bottom? That's what I want to know," said Mike Aaron, general manager of the LaQuinta Inn and Suites on West Kellogg.

Some national experts are predicting a financial bloodbath as hundreds or thousands of newly built hotels across the nation default because their owners can't refinance the three- to five-year mortgages that were popular during the hotel construction boom of 2004-2008.

The good news is that, as usual, Wichita never flew as high as most places, so it won't have as far to fall.

Local hotelier Jim Korroch said business is off 7 to 8 percent at his hotels, the Courtyard by Marriott Old Town and the Residence Inn at 13th and Greenwich.

He'll be OK, he said, because he has long-term financing and strong brands to pull in travelers.

So, who will be in trouble?

"Anyone who is overleveraged," he said. "And hotels that don't have strong brands or strong reservation systems."

That was then...

It's been a good five years in the hotel business in Wichita.

Eleven hotels have opened in the area since 2003, according to industry analyst Smith Travel Research of Hendersonville, Tenn. The market now has 108 hotels and 8,250 hotel rooms.

Rooms rose from an average of $60.45 a night in 2003 to $76.07 today, a 26 percent increase.

Rising room rates and occupancy triggered new construction.

Even with additional hotels, Wichita hoteliers enjoyed a healthy increase in revenue per room per night of 39 percent over those five years.

Revenue for Wichita area hotels in 2008 was $147.6 million, a 50 percent increase over 2003.

...and this is now

Nationally, hotel revenue started falling in the fall and accelerated in the winter.

PKF Hospitality Research is forecasting that the average American hotel will experience a nearly 10 percent drop in revenue this year.

The fancier the hotel, the harder the fall, say experts. Five-star hotels in New York are cutting room prices by two-thirds to lure business, said Joel Ross, an investment banker who created the securitization of hotel financing in the early '90s.

Jan Freitag, vice president of Smith Travel Research, agrees.

"It's not going to be easy," he said. "We'll see rough operating conditions through the summer."

Wichita hoteliers felt the first real pinch of the downturn in January, with a fall in occupancy of 6.1 percent and in revenue per room of 4.9 percent, according to Smith Travel Research.

That fall in business will be aggravated by the fact that hotels that got financing early last year are still under construction and will open this year.

In Wichita, at least five hotels will open this year.

Korroch is close to opening a new hotel, a SpringHill Suites, at 13th and Greenwich. He got the financing before the credit spigot was turned off.

Hotel owners will be reluctant to lower prices, he said, although they might if competitors drop their prices. Eventually, everybody loses in a price war, he said.

"It takes years and years to get back (the former prices)," he said.

Credit crisis

A potentially fatal factor for some in the industry is the mortgage crisis.

Huge numbers of hotels were built in the past five years using three- to five-year floating rate mortgages, said Ross, the investment banker.

Just as in the housing crisis, many borrowers contributed little equity and relied on rising values to make the loans work.

Now, revenue is down and credit is hard to find. The result, Ross said, is that the value of hotel properties across the nation is plunging, pushing mortgages underwater. The next phase will be an epidemic of defaults.

Hoteliers who borrowed locally from bankers they know and have a lot of equity might be able to refinance.

If not, he said, just drop off the keys on the way out.

"It's just like all the people who took 98 percent loans on houses they shouldn't have," he said. "The same thing exact thing happened in the hotel business."

Theron Froggatte of Oppenheimer & Co. in Wichita sells the debt for development projects, such as hotels, to banks in the region.

Most banks don't want to refinance because they are trying to rebuild capital ratios.

"The banks are having to divest existing hotels to get their concentration down," he said.

But, it's not a big problem in Wichita, said Gary Schmitt, executive vice president at Intrust Bank.

He said he'd be surprised if more than a handful of Wichita hotels are financed by short-term mortgages with balloon payments. But for those who do:

"They need to start negotiation sooner than later," he said.

The new business environment will be a challenge, acknowledged hotelier Jason Madhu.

Madhu helps run his family's Red Carpet Inn at 47th South and I-135. Last year, his family took a financial leap by building Best Western Eastgate Inn & Suites on East Kellogg. It will open in May.

Fortunately, he said, the family is using long-term debt and won't have to refinance anytime soon.

He remains optimistic that his family's hotels and the local industry will come through this downturn OK.

"Times are tough," Madhu said. "But I don't see anyone going out of business."

Reach Dan Voorhis at 316-268-6577 or [email protected].

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