Homes weren’t the only buildings investors bought at the top of the market and then couldn’t unload.
Many investors and companies bought hotels for inflated prices in 2005 to 2007 and now are facing high debt ratios, sinking property values and weaker occupancy rates that result in lower profits.
While analysts aren’t predicting widespread foreclosures like in the housing market, they are watching certain hotels.
“The most at-risk are the secondary markets and those with new developments,” said Alan Reay, president of Irvine-based Atlas Hospitality Group, a hotel consultant.
Orange County typically is considered a first-tier market, but some hotels could be on shaky ground if the recession lingers.
Moody’s Corp. of New York in February said hotel values could decrease by another 30% this year.
More than 100 commercial mortgage-backed securities loans backed by hotel assets are set to amortize this year, according to Greenwich, Conn.-based RBS Green-wich Capital. That means borrowers who were only paying the interest on their hotel loans will have to increase their cash flow enough to carry bigger payments or face foreclosures.
PKF Consulting Corp. in January predicted that the number of U.S. hotels unable to meet debt service payments could jump by 25% this year.
Some hotels in the Coachella Valley already have defaulted. At least one full-service hotel in OC is in workout.
“The number of notices of default filed by lenders jumped as early as the second quarter in 2008,” Reay said.
Questions about Profitability
Don Wise, global hospitality group managing partner for Irvine-based Johnson Capital, said forecasts of hotel profitability already have been revised this year from a projected 2% drop to an expected 11% drop, leading to more uncertainty for hotel owners.
“We don’t even know what the game is yet,” he said.
Any hotel purchased or opened later than 2005 could be at risk because owners had little time to build equity before the crash, Reay said.
Notable OC hotels that changed hands or debuted during that time include:
n Hilton Anaheim, purchased by Newport Beach-based Makar Properties LLC in 2007 for $160 million. The new owners spent another $60 million on renovations that have bolstered the hotel’s attraction for conventioneers.
n Laguna Cliffs Marriott Resort & Spa, which sold for $200 million in 2007 to an institutional client of Hartford, Conn.-based Cornerstone Real Estate Advisors.
n The 238-room Wyndham Orange Coun-ty, purchased by Makar Properties in 2006 for a reported $42 million.
n The Embassy Suites Irvine, purchased in 2006 by HEI Hospitality LLC of Norwalk, Conn., for $55 million.
n The 285-room Sheraton Garden Grove, which opened last July.
The deepening recession, a downturn in business travel and tightened corporate budgets have contributed to occupancy decreases of as much as 25% compared to a year earlier at the region’s luxury hotels, Reay said.
There’s little relief in sight.
The Atlanta office of PKF Consulting reported in January that overall lodging demand is expected to be down by 4.2% by the end of this year compared to 2008.
Timeshare and condo-hotel operators also have been hit hard.
Parsippany, N.J.-based Wyndham World-wide Corp. reported a $1.36 billion fourth-quarter loss due to a one-time charge related to its vacation ownership business.
Wyndham reported that overall timeshare sales dropped 9.8% in the fourth quarter and profitability declined 6.4%. The company also eliminated 4,000 jobs in its timeshare division.
Wyndham Worldwide opened a 241-unit Worldmark by Wyndham vacation ownership club next to the Anaheim GardenWalk last fall.
Some investors,including Newport Beach-based Unique Hotels,are trolling for distressed assets. Unique’s Managing Director Eric Prevette said the company is focused on distressed and underperforming assets in major markets for its private equity fund investors based in Britain.
“There are prospects out there, but debt is hard to come by,” Prevette said.
The company currently is looking at prospects in Laguna Beach and Anaheim.
“We think there will be other opportunities,” he said.
Prevette, who previously was president of Irvine Company’s resort properties division, said some owners still aren’t convinced that their assets were overvalued in recent years.
Despite the current dismal outlook, Prevette said OC may be better positioned than other markets to weather the downturn. The county’s most recent heyday of sales and development peaked around 2006, leaving a few half-finished projects.
Several hotels on the drawing boards, such as Makar’s W Hotel in Huntington Beach and the planned hotels at Anaheim GardenWalk, had not yet broken ground when the markets tumbled. Those projects likely are to be pushed back until conditions improve.
