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Hotel Lawyers with the pulse of the hotel industry from ALIS. Mark Woodworth of PKF Consulting shared his latest analysis of the hotel industry with us, as well as his slides from the ALIS conference. The picture is not pretty. Mark says, that if you're waiting for the recovery, the key word is "PROTRACTED." Here are the details.

A deteriorating situation getting worse. Mark Woodworth views employment as one of the best measures of the economy's health. Conversely, unemployment shows the economy's weakness. The situation is pretty bad and has been getting worse.

Loan delinquencies growing. The picture on the loan delinquencies looks pretty grim, with home equity loan delinquencies peaking near the end of 2010. We can only guess where hotel CMBS delinquencies will go from here, but here is Mark's chart on results to date.

Protracted hotel supply-demand disconnect, declines in occupancy and ADR, and record declines in NOI. PKF is projecting a protracted disconnect in supply and demand for at least 31 months -- a new record -- as shown in the chart. This leads to protracted declines in occupancy and ADR, with ADR recovering only in the second quarter of 2010. And these factors in turn cause, what Mark calls "a modern record" in NOI declines, which NOI going positive only in mid-to-late 2010.

"Explosion" in hotel cap rates. PKF Consulting is forecasting an "explosion" in cap rates for hotels, up by 210 basis points from today through 2010 to 9.7%. Falling NOI and exploding cap rates lead to a projected decline in hotel values of more than 20% in 2009, with no significant improvement in values until 2012.


Less than 30% of all CMBS Hotel loans since 2005 have LTVs over 70%. So where does this leave lenders and borrowers in terms of "loan to value" or "LTV" ratios? This final slide suggests that at the end of 2008, less than 20% of the CMBS loans originated since 2005 still had an LTV greater than 70%.

Let me turn that around to say it differently: At the end of 2008, more than 80% of the hotel CMBS loans have less than a 70% LTV, and in 2009, the experts are predicting record RevPAR and NOI declines with an "explosion" in cap rates of 210 basis points . . . and no improvement in value for some time. This does not bode well.


Hotel bankruptcies around the corner?

Hotel bankruptcies have already begun, but we see the flow speeding up as lenders and owners "see the writing on the wall." There will be tremendous opportunities here for someone.

See some of our selected articles at www.HotelLawBlog.com on hotel bankruptcies, workouts and turnarounds.