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The Current Recession is Painful But Brings a Dose of Reality to Capital Markets -
In 2006-2007 Hotel Owners Were Borrowing 80% Loan to Value at Just
110 Basis Points over Treasury Rates!


Economic Uncertainty Forms Backdrop of Cornell Hospitality Real Estate Roundtable

Ithaca, NY, December 4, 2008 – Although the current recession has already dampened demand and deflated asset values, participants in the second annual Cornell Real Estate and Finance Roundtable see opportunities for astute investors and operators. The November 2008 roundtable, conducted under the aegis of the Cornell Center for Hospitality Research drew more than two dozen participants and was hosted by center partner Proskauer Rose at its New York City office. 

The economic downturn and credit freeze unavoidably framed the roundtable discussions. Mark Woodworth, president of PKF Hospitality Research, said that his analysis forecasts weak demand through 2009, with a recovery in 2010. “Two factors are amplifying this demand weakness,” he noted. “First, reductions in employment will reduce business travel. Second, people need to appreciate the essential connection of airline capacity and hotel demand. Each 10.0-percent change in airline capacity means a 3.9-percent change in hotel demand.” PKF forecasts that hotels will lose approximately 1.0 percent of demand in 2009 due to airline capacity cuts. 

Left to right: Joel Eisemann, Executive Vice President, Owner &
Franchise Services, Marriott International, Inc.; Mark Carrier,
Senior Vice President, B. F. Saul Company Hotel Division
Unlike past downturns, however, the industry is not awash in excess supply additions. Mark Lomanno, president of STR Global, explained: “We see 195,000 rooms under construction, or about 4 percent of supply. However, 40,000 rooms will close next year, thus mitigating the effects of new supply.” Lomanno said that the real question for the industry is whether the excessive discounting of the last recession will return. “Discounting lowers the bar for the entire supply, and everyone suffers—except consumers,” he said.

The relatively favorable picture on supply additions may be cold comfort to property owners. Gary Mendell, chairman and CEO of HEI Hotels and Resorts, presented his analysis of why asset values will continue to decline. Mendell anticipates a drop of 25 to 30 percent in hotel assets in 2009, based on an examination of the two key factors involved in asset valuation, which are cash flow growth and cost of capital. Both are moving in a direction that decreases asset values; cash flow growth is dropping, while cost of capital is increasing. Pointing to historical capitalization rates of 9 percent, other participants stated that asset values must drop by an additional 20 percent to return to that 9-percent level.

Looking at credit markets, Cornell professor Daniel Quan observed that the current credit crisis is vastly different from any previous period. Whereas past problems have resulted in credit rationing, this time credit has simply evaporated. Loans are unavailable to even superbly qualified borrowers, he said. Panel members agreed that the key issue of 2009 will be “refinancing risk,” when borrowers cannot find funds to pay off a maturing loan with a new note. Augmenting this problem, the large “syndication loan” market will be frozen next year.

While the downturn and credit freeze are painful, it may also bring a dose of reality to capital markets, according to roundtable participants. Michael Medzigian, Chairman and Managing Partner of Watermark Capital Partners, pointed to the "irrational” capital markets of 2006-2007. “Something was wrong when owners were borrowing 80 percent loan to value at just 110 basis points over Treasury rates,” he said.

In view of the risk from upcoming recapitalizations and refinancing, the hotel industry will present opportunities for those who buy well priced properties. The most active buyers may well be pension funds, life insurance companies, and hedge funds, in the view of Cornell professor Jack Corgel. He believes such unregulated lenders will have the advantage in financing transactions in the coming year.

The roundtables are invitation only events. Partners of the Center for Hospitality Research have a guaranteed seat at each roundtable. The roundtable was organized and chaired by Jan deRoos, the HVS International Professor of Finance and Real Estate at the Cornell School of Hotel Administration. Future center roundtables scheduled in spring 2009 will include current issues in hospitality design, labor and employment law, and marketing. The next Real Estate and Finance Roundtable is scheduled for May 2009.

About The Center for Hospitality Research
A unit of the Cornell School of Hotel Administration, The Center for Hospitality Research (CHR) sponsors research designed to improve practices in the hospitality industry. Under the lead of the center's 75 corporate affiliates, experienced scholars work closely with business executives to discover new insights into strategic, managerial and operating practices. The center also publishes the award-winning hospitality journal, the Cornell Hospitality Quarterly (formerly the Cornell Hotel and Restaurant Administration Quarterly). To learn more about the center and its projects, visit 


Jennifer Macera

Also See: How Will You Finance Your Hotel Project in 2007? / Jim Butler / January 2007
Debt Financing Alternatives & Debt Restructuring Strategies in the Lodging Industry / Anwar R. Elgonemy / Sept 2002


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