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Does "End of the Recession" Mean "Recovery"?
Not for Luxury Hotels!

By Jim Butler
September 1, 2009

From some reactions, you might think that the likely "End Of The Recession" by the end of 2009 means that the "Recovery" is close behind. 

Unfortunately, what follows next will not feel much better for many for a very long time. Nowhere is that more true than in the luxury hotel segment, where Smith Travel Research foresees a 27% drop in RevPAR for 2009 followed by another 9% in 2010!

Here are a few of the most interesting slides from Smith Travel Research and other industry sources since August 20, 2009, focusing on the luxury hotel segment. How bad are things? How bad are they likely to get from here? Fasten your seat belt!

NOI for all hotels is projected to hit all-time low with almost a 40% decline

For the last 70 years, at least since such records have been kept, the NOI of the hotel industry has never taken such a plunge. According to PKF, 2009 NOI for the entire hotel industry (all segments, all geographic regions) will fall nearly 40%, and it won't start to improve until 2011 at the earliest.

Most experts believe that average daily rate (ADR) cannot turn around until demand has recovered for a little bit. Moody's doesn't see a significant improvement in occupancy over the next 4 years. As of August 26, 2009, Moody's senior analyst did not see occupancy recovering even to 2009 levels through that period.

This is a very negative outlook for any hotel lender or owner. But the outlook is even worse for the luxury and full service segments of the hotel industry.

Luxury hotels are being hit harder

Given the horrific 40% NOI declines suffered by the entire industry, it is painful to think that one segment might do even worse, but that is the prospect for the luxury segment from both Smith Travel Research and PKF.

Smith Travel is projecting a -27% decline in RevPAR for 2009, followed by an additional -9% RevPAR decline in 2010. PKF is projecting only slightly more favorable numbers -- a -26% decline in 2009 and a -0.4% decline in 2010 (based upon a 7% more optimistic view of occupancy in 2010).

These views are summarized in the slide below.

Smith Travel notes that in addition to the 10% supply increase in the number of luxury hotel rooms, there is another 5% supply increase under construction and a further 5% in the pipeline. That will mean more supply to absorb in the future when demand comes back.

What does this all mean? What do you do as an owner or lender? 

Hotel values will come back. The only question is how long it takes, and the data is suggesting at least a minimum 3 to 4 year hold to get back to 2008-2009 levels. Who knows when we get back to peak values again.

What price can you get if you sell now? Market value or liquidation value? 

For many owners and lenders, this comes down to a "sell now or sell later" decision. There are at least a few key points to keep in mind.

Stephen Rushmore, founder and CEO of HVS, said a few days ago that there are at least two big differences between a seller realizing "market value" on a hotel property instead of "liquidation value." According to Rushmore, today

1. It takes 1-2 years to provide adequate marketing time to realize a market value price in today's market. 
2. Liquidation value will be 20-50% below market value.

As one of the premier hotel brokers in the country, Hodges Ward Elliott translates this into the following chart, showing how much of a discount you will take today in a market value sale or a liquidated value sale from 2007 hotel values. Notice that there is a much steeper discount likely to be suffered for a "forced value discount" or liquidation sale.

Where do you want to be in the line for sale? 

A few final considerations. If you are going to hold on for the long term, that is fine. be sure you have plenty of capital to get through the ups and downs likely to be encountered along the route.

But if you are thinking of selling, a 1-2 year marketing process is a long time. And it is likely to get longer as more distressed owners and lenders throw in the towel. There are many indicators that the number of distressed hotels will range from 5,000 to more than 12,500 according to Steve Van of Prism Hotels in Dallas. As more sellers put their inventory on the market, the marketing times will probably increase, values may come down, and your ability to sell will depend (at least in part) on when you "got in line" to sell.

Before you go for the mothballs for that hotel, remember the analysis recommended in our recent article: "Closing that hotel may be the worst money-saving idea you ever had!").

We would be happy to help you evaluate your options and develop the best plan from here.

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: Do You Know the 8 Dos and Don'ts of Handling Troubled Hotel Loans? / Jim Butler / November 2008
Workouts and Special Servicing for Hotel Mortgage Loans: What Is So Different About Troubled Hotel Loans / Jim Butler / November 2008



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