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Considering Options for Dealing with Troubled Hotel Assets

The Operative Word for the Hotel Industry Today Is "Reset"

By Jim Butler, June 19, 2009 - Mark Woodworth and his colleagues at PKF Hospitality Research have released PKF's latest report on the U.S. lodging industry, it's turning points and prospects. I thought you might find it useful as you consider options for dealing with troubled hotel assets, and hope you will keep us in mind as you face coming challenges.

Highlights of the PKF updated forecast

The PFF report is a little startling. I found the following points noteworthy:

  • With Moody's increasingly pessimistic projections of unemployment, PKF has revised its RevPAR forecast accordingly. They now expect a 17.5% RevPAR decline in 2009 and a further 3.5% RevPAR decline in 2010. 
  • 2009 will be the weakest year on record in the U.S. lodging industry, and 2010 will not be much better. 
  • Hotel industry pricing power has collapsed. There will be nine consecutive quarters of the year-over-year reductions and ADR continuing through the fourth quarter of 2010. RevPAR growth will not begin until 2011. 
  • PKF projects that "the typical U.S. hotel will suffer a 37.8% decline in NOI in 2009 and an additional 9.2% in 2010." 
  • It has been 72 years since PKF recorded unit-level profit declines in excess of 20%. "Needless to say, profit declines in excess of 30% have a wide ranging impact on hotel values, debt coverage, default covenants, insolvency."
The operative word for the Lodging Industry is "RESET"

As expert after expert told us in May at our Meet the Money® 2009 conference, the operative word for the hotel industry today is "reset". This means a complete reset in hotel values, leverage and financing structure.

While Steve Rushmore of HVS is projecting a 45% decline in hotel values, bottoming out in 2010-2011 with a recovery in 2014, the de-leveraging of hotel investments, increased cap rates, and scarce financing will make hotel investments problematic for some time.

Good news for those who can last to 2011 and 2012

The PKF report forecasts an exceptionally robust recovery when it finally comes in 2011 and 2012. PKF foresees an average annual increase in RevPAR of 9.2% for those years, with profits rising 17.8%. They conclude with: "If you are an owner, investor, or lender that can weather this year and next, the return to prosperity should be strong and quick."

About the Author:
Jim Butler is one of the top hotel lawyers in the world. GOOGLE “hotel lawyer” or “hotel mixed-use” or “condo hotel lawyer” and you will see why.  He devotes 100% of his practice to hospitality, representing hotel owners, developers and lenders.  Jim leads JMBM’s Global Hospitality Group®—a team of 50 seasoned professionals with more than $40 billion of hotel transactional experience, involving more than 1,000 properties located around the globe. In the last 5 years alone, they have brought their practical advice to more than 80 “hotel-enhanced mixed-use” projects, a term Jim coined to fill a void in industry lexicon.  This term describes one of the hottest developments in real estate-where hotels work together with shopping center, residential, office, retail, spa and sports facility components to mutually enhance the entire project’s excitement and success. Jim and his team are more than “just” great hotel lawyers.  They are also hospitality consultants and business advisors.  They are deal makers.  They can help find the right operator or capital provider. They know who to call and how to reach them. They are a major gateway of hotel finance, facilitating the flow of capital with their legal skill, hospitality industry knowledge and ability to find the right “fit” for all parts of the capital stack.  Because they are part of the very fabric of the hotel industry, they are able to help clients identify key business goals, assemble the right team, strategize the approach to optimize value and then get the deal done.  Jim is the author of the Hotel Law Blog,  He can be reached at +1 310.201.3526 or

Jim Butler
Chairman, Global Hospitality Group
Jeffer, Mangels, Butler & Marmaro LLP
1900 Avenue of the Stars, 7th Floor
Los Angeles, CA 90067-4308
(310) 201-3526 direct
Also See: Is Leverage Dead or Just Deadly -- a Controversial New Investment Reality Nay be Taking Hold / Jim Butler / May 2009
Hotel Borrower Dilemma: the Note Is in Default or Coming Due; Helping Borrowers Create Value with Distressed Hotels / Jim Butler / April 2009
Terminating Hotel Management Agreements without Liability / Jim Butler / Arpil 2009



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