Thank you for sharing!

Your article was successfully shared with the contacts you provided.

IRVINE, CA-As California opened a record 10,286 new hotel rooms in 2008, loan defaults were already showing that there was “probably no worse time for California to have a record number of new hotel rooms entering the market,” according to a new survey on the state’s hotel development industry. Alan X. Reay, president of Irvine-based Atlas Hospitality Group, tells GlobeSt.com that his company’s analysis of the state’s hotel market indicates that it is not a question of whether but just a question of when more hotels go into foreclosure.

Reay says that at least 25 hotel properties have gone into foreclosure and more than 70 are in default on their loans, which he describes as just the beginning of a wave of hotel foreclosures in California. Many of the more than 600 hotels that sold in California in 2005 and 2006–the boom years for hotel sales–will be candidates for foreclosure, according to Reay. “It’s inevitable that we are going to see a lot of lender-owned hotels,” he says. He notes that Atlas is spending most of its time these days talking to lenders, analyzing their portfolios to forecast which of their properties are most likely to face problems.

Many of the lenders already have problem properties in Texas, Florida, Arizona, Michigan and Nevada, but the rate of defaults and foreclosures has actually remained lower in California, according to Reay. He explains that with falling revenues that are insufficient to pay their mortgages, many California hotel owners “are digging into their own pockets to make debt service.” But he says that can only go on for so long. RevPAR, began nosediving late last year at a rate that Reay calls “unprecedented.” It fell an average of 18.5% in January this year compared with January last year, dropping in 26 of the 27 California markets that Atlas tracks.

When the foreclosed hotels start selling, either as defaulted loans or as REO, “We will see drastic repricing like we’ve never seen before,” Reay says. Some of those who bought distressed hotel assets early in the game have already found out that they paid too much, he notes, even though those buyers bought the properties at 50% to 60% of what was appraised value a year or two ago. “The drop in revenue has basically wiped out their NOI,” he says.

The Atlas survey shows that the 10,286 new rooms that opened in 2008 represented an 81% increase over 2007. San Diego County led the way, accounting for 20% of the new rooms in 2008, with Los Angeles and Orange counties following at 12% each. Other Southern California markets contributing to the new supply in 2008 included Riverside County, with 651 new rooms, including the 340‐room Agua Caliente Casino Hotel in Rancho Mirage, and San Bernardino County with 1,126 new rooms in 11 hotels.

Obviously, all of the new hotels that opened in 2008 were planned during the boom years of 2005 to 2007, Reay points out. Some 12,000 new rooms are still under construction and scheduled to open this year, but that might be the end of construction for a while. Another statistic that Atlas tracks is hotels in the planning stage, which in good times is a reliable indicator of how many new rooms will be built. The Atlas survey shows 564 new projects being planned for a total of more than 71,000 new rooms, but Reay says that nearly all of those have been either postponed or abandoned.

In addition to its report on hotel development, Atlas will soon issue a report on 2008 hotel sales, according to Reay, who says that preliminary figures indicate that sales dropped by 50% to 60% last year. The next wave of sales will be distressed properties, he says, but there is still a significant bid-ask gap that has to be bridged before that can happen. “I hate to say it, but we have a pretty long, protracted down cycle ahead of us. We’re only in the first inning of it,” the Atlas president says.

Want to continue reading?
Become a Free ALM Digital Reader.

Once you are an ALM digital member, you’ll receive:

  • Unlimited access to GlobeSt and other free ALM publications
  • Access to 15 years of GlobeSt archives
  • Your choice of GlobeSt digital newsletters and over 70 others from popular sister publications
  • 1 free article* every 30 days across the ALM subscription network
  • Exclusive discounts on ALM events and publications

*May exclude premium content
Already have an account?


Join GlobeSt

Don't miss crucial news and insights you need to make informed commercial real estate decisions. Join GlobeSt.com now!

  • Free unlimited access to GlobeSt.com's trusted and independent team of experts who provide commercial real estate owners, investors, developers, brokers and finance professionals with comprehensive coverage, analysis and best practices necessary to innovate and build business.
  • Exclusive discounts on ALM and GlobeSt events.
  • Access to other award-winning ALM websites including ThinkAdvisor.com and Law.com.

Already have an account? Sign In Now
Join GlobeSt

Copyright © 2021 ALM Media Properties, LLC. All Rights Reserved.