The last year of this decade will be the most challenging in a long time for the US lodging industry. A vast array of statistics--from credit availability to consumer spending--point toward a year that will be, if not a train wreck, at a minimum a time for caution. Businesses will continue to reduce all types of operational and capital expenditures. This will result in a continued decline in GDP, which hotel demand is highly correlated to.

Until recently, the US economy was surprisingly resilient, however, as the global financial crisis spread, the nation slipped into recession. Declining fundamentals and a scarce availability of debt capital have produced a near frozen transaction market. RevPAR decreased last year for the first time since 2001--it is expected to decline roughly 10% during 2009, remain flat in 2010, and finally increase in 2011. Travel is largely a discretionary item for both corporations and leisure consumers, and the industry’s pricing power will buckle as average room rates in all hotel categories are expected to decline during the coming year.

While the ability of hotel operators to maintain price integrity is stronger today as compared to the last downturn, the mix of business will shift. Declining levels of corporate transient demand, coupled with a decrease in long term group booking volumes, will generate an increase in leisure transient business, but at lower rates. Price-conscious short-term group bookings will also exert downward pressure on average room rates over the near term.

While in the near term, profit margins are expected to erode, these declines will be somewhat muted by aggressive cost cuts implemented by hotel operators at the beginning of this down cycle. The silver lining of tight credit markets is the slowdown in new supply growth, as the number of proposed hotel projects abandoned or deferred has dramatically increased during the past several months. Once current new supply is absorbed, the US lodging industry will experience minimal new supply through 2014.

Due to pending maturities from 2010 through 2012 of undercapitalized CMBS transactions originated from 2005 to 2007, hotel debt capital is likely to remain constrained. When these maturities come due, investors will either be required to inject additional equity to cover funding shortfalls, or be forced to sell assets during a less than ideal time. Like prior downturns, the numbers of hotels changing hands will accelerate into a major wave of mergers, acquisitions and consolidations among hotel owners. The bid/ask standoff between hotel property owners/sellers and buyers will be resolved by forced sales, which will provide pricing clarity and market traction. Owners with highly-leveraged maturing debt will become motivated to liquidate assets, and borrowers will experience sharply lower proceeds, higher spreads, and more stringent debt covenants. Despite constrained credit markets, some lodging companies could be taken private by unleveraged buyers. Once the re-pricing of US hotel assets occurs, there will be a lot of buying opportunities.

Sophisticated financiers of all asset classes are already scouring the carnage of the global financial crisis for opportunities. Blackstone Group has stated that it has $12 billion of equity to capitalize on compelling opportunities in commercial real estate. A team of high-profile investors including George Soros and Michael Dell bought the remains of failed bank Indy Mac for $13.9 billion. The sale of an unsuccessful bank to a group of investors rather than to a healthy bank is unusual; some believe that this indicates evidence of a bottom being placed in the financial and housing crisis. Finally, speculation has arisen that Sam Zell may be positioning for a takeover bid of Starwood Hotels & Resorts, one of the world’s largest hotel and leisure companies after it was revealed that the company signed a confidentiality agreement with him. Although Zell is not infallible, he recognizes value.

The CB Richard Ellis Valuation & Advisory Services Hospitality & Gaming Group continuously monitors the major US hotel sale transaction market. The CB Richard Ellis 2008 Major US Hotel Sales survey includes 77 single asset sale transactions over $10 million each that are not part of a portfolio allocation. These transactions total $3 billion, and include 18,600 hotel rooms with an average sale price per room of $170,000. By comparison, the CB Richard Ellis 2007 Major US Hotel Sales survey included 112 single-asset sale transactions totaling $8 billion in trades, and included 36,400 hotel rooms with an average sale price per room of $219,000.

Observations from the CB Richard Ellis 2008 Major US Hotel Sales survey include:

• The number of major U.S. hotel sale transactions declined by one third. The average sized deal dropped 45 percent from $73 million to $41 million per transaction, and the price per room paid declined 22 percent.
• Only 5 major U.S. hotel sale transactions greater than $100 million took place during 2008 compared to 20 such deals in 2007.
• Only 2 major U.S. hotels traded for more than $500,000 per room during 2008, far less than the 13 transactions which occurred in 2007.
• Hotel investments in and surrounding major 24/7 markets along both U.S. coasts continue to be in demand.
• Apple REITS, a series of public non-listed REITS focused on the ownership of upscale, extended-stay and select-service hotels, dominated the current field of purchasers in the survey with 20 acquisitions (more than 25 percent of the total) during 2008. Hersha Hospitality Trust and Noble Hospitality Fund LLC are tied as the second most active purchasers in the survey, with 3 acquisitions each.
• Ashford Hospitality Trust was the most active seller of major U.S. hotel assets with 4 dispositions during 2008.

Savvy hotel centric investors will prosper on the backside of the current economic downturn. Out of every severe financial crisis comes opportunity. Government intervention throughout the world to stabilize and stimulate global economies will ultimately re-establish and bolster credit market liquidity. During these unstable times, investors currently perceive cash as a safe haven, and real estate is clearly not a favored asset class. When market volatility subsides and the outlook clears, real estate, and particularly hotels will once again provide superior risk adjusted returns for those who have currency to leverage.

Daniel Lesser is the senior managing director-industry leader of the Hospitality & Gaming Group at CB Richard Ellis (CBRE) based in New York City. The views and opinions expressed in this article are the author's own.