The Hotel Industry Is Finally Stabilizing
The Hotel Industry Is Finally Stabilizing There is growing evidence from many of the people I speak to in the hotel industry that revpar is beginning to stabilize. By late this year it is highly likely there will start to be some signs of small improvement, although for the full year the numbers will still be slightly down or flat at best. Next year will start to see some improvement and 2012 will be a good year for revpar growth. However, some appraisers are already going way over board projecting over optimistic value increases and revpar growth that has no connection to reality. I have written other articles which demonstrate why hotel appraisals usually have no connection to reality and the methodology is totally flawed. They make assumptions that things only go up and at growth rates and to levels that are silly. One major appraiser now assumes that there will be 7% debt at 70% of some make believe value in 2012 and he uses this to justify a refi at excessive levels in order to make the cash flows unrealistically high in the early years. Hotels will do better over the next several years, and values will improve, but we need to be realistic and not get carried away with euphoria. Buying hotels or lending to hotels now will prove to be very good, and profitable so long as the going in value is realistic and you do not assume wild increases as some appraisers and brokers project. If there was ever a time to lend on hotels it is now. If well underwritten, and properly levered, you cannot lose on loaning to hotels now. I do believe there will be debt available in 2012 and sooner in some cases, but it will be carefully underwritten and no more than 65% on the A piece portion. There will be higher leverage available, but only in the form of a B piece at far higher spreads. The source of funding for many smaller deals was always the local and regional banks. Those sources are now very restricted due to many are out of business or severely restricted by regulators. There will simply not be the ready availability of loans for the smaller- under $15 million deal. There will be a lot of hotels coming out of banks and servicers over the next two to three years. They are buried in defaulted and foreclosed properties. It will simply take time for these to show up in the market, but when they do cap rates will likely rise due to a far greater supply and higher interest rates. The frenzy right now to buy hotels is over blown due to the tiny number of properties offered and too much money chasing them. As a totally side note, the obscene activities of bribery, corruption and outright lying on the part of Pelosi and the administration regarding health care has sunk Washington to a new low in our history. This is a new entitlement we cannot afford, and it will add to the deficit which is already way out of control. The whole concept that they know better despite clear polling against the bill, and no bipartisan support, defies everything this country is about. Whatever happened to the voters get to have their say. Nancy Pelosi knows better than we do what our healthcare should be, and it is OK because we will learn to love it after they shove it down our throat. Medicare has proven that the country is not able to afford these mass spending programs and we are headed to the cliff in ten years or less.