By Jim Butler
21 May 2009
Here are the insights provided by hotel industry leaders at Meet the
Money® 2009 on the issue of "recovery".
"We look for a serious recovery in 2011. Then the question is how long
will it take to get back to where we were. Appraisals are forward looking.
We typically build in a rebound - first in occupancy, and then in rate.
We are projecting a 5-year recovery now, and in some properties a 6-year
recovery. It was 7 years in the 1980s. But it will be market by market
and property by property." / Suzanne R. Mellen CRE MAI Managing
Director HVS International |
LIIC's recent survey of members indicates the majority believe that
lodging real estate investment will get worse before it gets better. The
recession will last up to 18 months or more and hotel values will continue
to decline. / Michael Cahill, CRE, MAI, FRICS, CHA CEO and Founder
HREC |
"What is the "new normal"? We don't expect to get back to 2007 levels
until the next cycle after the first recovery from now."/ Henry Vickers
Director AEW Capital Management LP |
"The problem is asymmetrical information which causes a fundamental
disconnect between lenders and borrowers, and gives them very different
expectations. Lenders are getting information in arrears. They are not
even getting pace reports. They don't see what is happening now and going
forward. They are always a month or two behind what is going on. So here
we are in May 2009, and lenders are maybe getting reports on March or April.
They probably are not even getting a revised forecast. This is "Asymmetric
Information." Until lenders have same view of market as borrowers, there
will be no resolution of the markets." / Jonathan Falik Chief Executive
Officer JF Capital Advisors |
"At the Real Estate Roundtable a couple weeks ago, Bernanke addressed
the group. He seems very smart and listens a lot. He said, " You will begin
to see things get better in weeks -- not months." He said that in October,
our financial model almost fell off a cliff. We are not falling off the
cliff any more. That is positive." / Thomas Corcoran Chairman of
the Board Felcor Lodging Trust Incorporated |
"We will see RevPAR increases within 6 months after GDP pops, consumer
confidence increases." / Jonathan Falik |
Housing defaults are still not at Great Depression levels yet (10%)
but we are getting there. Our 90-day delinquency rate is about 7%. There
is a lot of stress on households. Contributing to the stress is household
debt to GDP, which was 40% after WWI, going up to 60% in 1980. This was
acceptable because rent was just another household expense. But after 1980,
household debt to GDP has skyrocketed and is now over 100%. So we will
not see the consumer driving the economy any time soon. / Richard Green
Director USC Lusk Center for Real Estate |
Beware of false bottoms! Things are still getting worse in the economy.
This is not the bottom. There are more shoes to drop. RevPAR declines are
severe. They have not bottomed and the hotel industry has not bottomed
yet, either. In fact, we have not stopped the accelerated decline. The
3-month moving average will go down for April. Maybe it won't go down quite
as much in May, but it will still be bad. And there is more. The continuing
increased supply problem is not over, but the worsening demand issue is
debilitating. Smith Travel Research likes to use a slide with light at
the end of the tunnel. David uses this one and asks, "Is it light at the
end of the tunnel, or is it an oncoming train?" / David Loeb Managing
Director RW Baird & Co |
Mark Woodworth, President of PKF Hospitality Research
This chart shows the PKF projections on where we are in the hotel cycle
of emotions and opportunity. We are in a period of capitulation foreclosures
and depression that will last through 2010, with relief beginning to appear
in 2011, and optimism coming only in 2011 or 2012. This slide emphasizes
that the time of greatest financial opportunity is in 2009 and 2010!
As measured by a 4-quarter moving average, employment and hotel room
demand do not start positive growth until 2011.
PKF projects that the employment levels affected by current recession
will not return to pre-recession levels of Q4 2007 for 15 quarters. They
will not return to pre-recession levels until Q1 of 2012.
We are not projected to hit the bottom of employment levels until Q1
of 2010, when employment levels will have decreased by more than 7 million
jobs. Many more jobs will be lost before they turn around, roughly a year
from now in April 2010, when unemployment peaks at 9.8%.
Big ADR declines will set any "modern record" in NOI declines for the
hospitality industry as shown in this chart. This will be the first time
since 1936 that NOI was down 30% or more. In part this is because of the
confluence of 3 factors
Mark Woodworth points out that there have been 122 recessions around
the world between 1960 and 2007. Only four of those 122 recessions had
all three of the following factors:
1. Credit crunch
2. Housing price bust
3. Equity price bust
Mark calculates that with all three of these depressing conditions,
GDP declines are 2 to 3 times greater.
When do we get out of this mess?
I don't know. But there is a lot of pain to endure before we get back
to what we thought was normal. We do believe that the next 12-18 months
represent the greatest buying opportunity in our lifetime, and that it
may well be a long time (7 years or more) before we get back to 2007 levels
of profitability and value, on an inflation-adjusted basis. We hope it
is sooner.
Jim Butler is a founding partner of JMBM and Chairman of its Global
Hospitality Group®. Jim is one of the top hospitality attorneys in
the world. GOOGLE "hotel lawyer" and you will see why. JMBM's troubled
asset team has handled more than 1,000 receiverships and many complex insolvency
issues. But Jim and his team are more than "just" great hotel lawyers.
They are also hospitality consultants and business advisors. For example,
they have developed some unique proprietary approaches to unlock value
in underwater hotels that can benefit lenders, borrowers and investors.
(GOOGLE "JMBM's SAVE program".) Whether it is a troubled investment or
new transaction, JMBM's Global Hospitality Group® creates legal and
business solutions for hotel owners and lenders. They are deal makers.
They can help find the right operator or capital provider. They know who
to call and how to reach them. |