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Observations: Atlas Hospitality Group 2009 Mid-Year
California Hotel Sales Survey / Jim Butler


By Jim Butler, July 24, 2009

National Implications From the Latest Hotel Industry Survey

The hospitality lawyers of JMBM's Global Hospitality Group received an early copy of the July 22, 2009 Atlas Hospitality Group 2009 Mid-Year California Hotel Sales Survey. This new Survey has an entirely different focus than the Atlas Survey released last month on hotel foreclosures that caused such a stir. Maybe the results are intuitive to some, but we found the quantification of distress in hotel markets quite remarkable, and we believe there are profound national implications of these Survey results.

The Atlas Surveys -- background. 

Atlas Hospitality Group specializes in the sale of California hotels. It was founded by Alan X. Reay in 1997. Since its inception, Atlas has sold more hotels in the state than any other brokerage firm. 

  • Atlas foreclosure Survey: On June 26, 2009, Atlas hospitality released the results of its study on foreclosures in California, revealing up to 2500 California hotels that were financed or refinanced between 2005 and 2007, and therefore vulnerable to default and foreclosure. 
  • Atlas 2009 Mid-Year California Hotel Sales Survey: The latest mid-2009 Survey, released today, has a different focus. It is a comprehensive analysis of the California hotel market, looking at the number of hotels sold, the number of hotels now available on the market, how many troubled hotel assets there are, and various marketing data including sales price trends and marketing periods. 
If you would like to speak directly with Alan Reay about the Atlas Surveys or get a copy of them, he can be reached at (949) 622-3409, [email protected] or

The new mid-2009 Survey - Highlights and Conclusions on the California market. 

While we refer you to the new Atlas Survey for complete detail on what is happening in individual California markets, the following is an executive summary of the continuing downward trends it documents. As noted below, we believe the data on the California market is scalable or generally representative of other hotel markets in the United States. In other words, we expect the same or similar experience in other major markets, subject to some variation for individual properties and markets.

What does the latest Atlas Survey conclude? According to Alan Reay, that data through June 30, 2009 show some alarming statistics:

  • The median price per hotel room is down 45.5% from the peak of December 2007 (down 36.5% from 2008) 
  • The dollar volume of hotel sales is down 88% from 2007 (down 81% from 2008) 
  • The number of hotels sold is down 72% from 2007 (down 51% from 2008) 
  • The number of hotels now available for sale jumped 53% in the first 6 months of 2009, and up 77.7% in dollar volume 
  • The ratio of hotels now on the market, compared to hotels sold, is a record of more than 19 to 1 (19 hotels on the market for every one sold) 
  • Atlas has identified 250 troubled hotel assets (meaning in default or lender owned), a ratio of 5 to 1 on hotels sold
What conclusions should you draw from this Survey data? 

When I asked Alan Reay what this means, he had two answers. 

First, to put this information all in perspective, he says that we have a 10 year supply of hotels on the market at the present absorption rate -- and that assumes no other hotels are put on the market, which Alan thinks is "highly unlikely."

Second, according to Alan Reay, unless you are prepared for a fairly long term hold -- say 3 to 5 years -- "a hard present value analysis is likely to show that you are better off selling today at a realistic market price." The alternative may be feeding a negative cash flow beast and waiting for a long time for value recovery." 

Reay says, "If you don't like the market price today, you are really not going to like it in 12 to 18 months from now." Basically, Alan sees that sellers have been looking for "yesterday's prices" and by the time they reconcile themselves to the price they were offered 6 months ago, that is not longer achievable.

Our advice? Hey it is "just money." So, do a present value analysis of likely cash flows on 3 alternate scenarios. Decide whether you have the stamina and capital for a long haul if you intend to hold. Or decide that you are a gambler. Be realistic and do it quickly if you are a seller. Many experts see values continuing to decline until at least 2011 or, more likely 2012. Some think values recover peak levels by 2014 and others think recovery to 2007 levels is TWO real estate cycles from now (given that a typical hotel cycle lasts 7 to 8 years, this could possibly be 10-16 years, i.e. 2019 to 2025).

What does the mid-2009 Survey mean in terms of the entire U.S. hotel market? 

Just as we think the California experience on loan defaults and foreclosures is representative of other major hotel markets in the U.S., we think that the California experience in hotel sales, sale prices, properties on the market, etc. is representative of the experience in the major U.S. hotel markets. For our rationale and support, please see Hospitality Lawyer: Hotel foreclosures on track to set new records in California and elsewhere.

What does this all mean? 

There is a lot more pain ahead for all commercial real estate, and particularly for hotels. It is not going to get better quickly. There needs to be a complete RESET in the industry -- a reset of values, leverage and expectations. That has not really happened yet, but there is about to be a terrible wrenching that will force it to happen.

In practical terms:

  • If you are a lender, watch your assets carefully. You may have rolled a maturity, but any hotel financed between 2005 through 2007 is likely going to have seriously deteriorating cash flows that have eliminated all equity, and threaten to impair ability to pay operating expenses. Don't be caught by surprise when a borrower gives back the keys and tells you payroll is due Friday (and there is no money in the operating account to pay it). 
  • If you are a borrower, what are your options? Do you have the capital to withstand the big RESET that is going to come, or can you get it? Is there another plan that makes sense for you? How do you handle a continuing downturn in the hospitality industry fundamentals and a long, slow recovery? 
  • As a lender or investor, what is your investment horizon or time schedule? If it is very short, sell or foreclose (and sell) now -- before further price deteriorations. If it is longer, and you have the capital and stamina, why not get the 30% IRR investors are looking for today on your own assets? Get some good advisors to help you plot the strategy to survive and thrive.
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 [email protected].
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
[email protected]
Also See: Hotel Delinquencies Predicted to Exceed 8% by Year End and Other Observations for Hotel Lenders and Hotel Owners / Jim Butler / June 2009

Hotel Bankruptcy Issues -- Special Purpose Entities Getting Approval to File Bankruptcy / April 2009

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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