In a recent study, Fitch found that 50% of upscale and luxury hotels that back recent-vintage CMBS may fail to throw off enough cash flow to cover debt service by the end of this year, thereby rendering US CMBS transactions with large concentrations of hotel loans ripe for downgrades.

Fitch managing director Eric Rothfeld attributes this trend to a slump in both consumer and business spending. And he does admit he was a bit surprised by what the data uncovered.

"Fifty percent is a big number," he says. "We didn't anticipate it would be that high. But it's an indication of the vulnerability these hotels have in a downturn."

Fitch reviewed $6.5 billion of high-end hotel loans included in 2006 and 2007 Fitch-rated fixed-rate US CMBS. Such properties, according to the rating agency, have seen their room revenues fall more than 20% from 2008 levels, which, in turn, would result in net cash flow declines of between 35% and 40%.

Even mid-scale will suffer, although not as much as high-end properties, Rothfeld states. "People are looking to save rather than spend, at least in the short term, which has created a lot of stress in the lodging industry," he says. "People aren't traveling to the same degree that they were."

Standards & Poor's recently revised its average RevPAR decline projection for 2009 upward to between 14% and 16% from 10%. With that steep a drop in revenue, S&P predicts that the CMBS lodging delinquency rate could match previous peak levels and hit 8% later this year or early 2010, thereby raising the possibility of hotels being foreclosed upon in coming months.

"CMBS delinquencies include foreclosures, so, yes, we expect the number of lodging foreclosures to rise," says Larry Kay, director in S&P's CMBS surveillance group. "Of course, this will likely vary widely by market and segment."

One sub-sector of the lodging industry that is also taking it on the chin is mid-scale with food and beverage. According to S&P, those properties registered the highest delinquency rate for all segments at 6%.

Even though the mid-scale with F&B sector is forecast to experience only a moderate decline in RevPAR as travelers trade down to lower-priced hotels, the segment nevertheless has a number of issues to contend with--namely: aging properties, outdated brands, high fixed costs, less pricing flexibility and low operating margins--all of which are exacerbated in a downturn, contends S&P.

There could be even more challenges on the horizon beyond 2009 and 2010. According to S&P, 182 loans with a current outstanding balance of $10.4 billion are slated to come due in 2011. Consequently, these maturities may come at the same time delinquencies peak, thus making for a tough 2011.

More problems may surface in floating-rate loans, which were underwritten at the height of the market with aggressive terms and short-term maturities on transitional properties. The vast majority of floating-rate paper--82%--were originated in 2006 and 2007, reports S&P. Although it counts only three floating-rate loans scheduled to reach maturity this year, S%P finds that "many lodging loans with remaining extension options are transferring to special servicing because they are not meeting the extension requirements in place."

Hardest hit areas include both Las Vegas, where Fitch relates that the city's convention authority reports that 30,000 room nights have been canceled so far in 2009, and Florida--which had three markets with the highest CMBS delinquency rates in the US--according to S&P. Those cities--Miami, Tampa and Orlando--account for 15% of the total lodging delinquency tally, as fewer domestic and international travelers visit its leisure destinations.

Yet Rothfeld contends that smart operators can survive in these treacherous times and avoid a default. "Experienced hotel managers," he says, "may reduce variable operating and administrative expenses to maintain profitability, or seek additional capital to carry a hotel through a downturn."