Hotels Feel the Pain of a Glut of Empty Rooms and Lower Room Rates

Hotels are slashing rates to attract customers. However, it's not working and Resorts are Suffering From Financial Strains.

From Arizona Central ...

A glut of empty rooms and panic pricing are taking a serious toll on hotel and resort owners in the Phoenix area.

Foreclosure proceedings were initiated against seven financially squeezed properties, two of them brand new, in the first half of the year. That's just one less than in all of 2008 and more than double the number in 2007, according to Ion Data, a Mesa real-estate research firm.

There are other signs of financial stress, too, including major liens filed against resorts that recently expanded or renovated, and big projects being put on hold, some midstream.

The worst part: Many experts say the foreclosure woes are likely in the early stages given the volume of big-ticket deals during the boom years, the severity of the hotel downturn in Greater Phoenix and few signs business will solidly rebound anytime soon.

"This is probably still the tip of the iceberg," said Robert Hayward, principal with the Phoenix hospitality consulting and research firm Warnick & Co.

Metro Phoenix, usually a magnet for vacationers and big meetings, continues to post some of the industry's biggest declines in occupancy, average daily rate and other measures, with many at the lowest levels on record, according to Smith Travel Research.

Preliminary figures show June occupancy was about 45 percent, nearly 10 percentage points, or 17 percent, below June 2008, when occupancy was already hurting. Most are calling it an industry depression, rather than recession.

Richard Warnick of Warnick & Co. said he'd be surprised if nearly all hotels and resorts, here and across the country, weren't in technical default on their loans, falling below required minimums on debt service coverage, for example, given the sad state of travel. That is often a precursor to more serious financial problems that prompt lenders to foreclose.

Nationally, the number of delinquent hotel loans has been climbing sharply since the recession deepened last fall. The delinquency rate jumped from 0.3 percent of so-called hotel commercial mortgage-backed securities loans in September to 2.8 percent in May, according to Realpoint data provided by real-estate services firm Jones Lang Lasalle.

The big questions are who is going to buy the troubled properties, when and for how much. The market for hotel deals is anemic. Nationally, there were just 19 transactions in the first half of the year, vs. 103 in the same period last year, according to Jones Lang Lasalle.

"From our standpoint, transactions have really just stopped," said Jeremy Allen, vice president in the Phoenix office of hotel brokerage firm Molinaro Koger.

He said the only activity is for smaller deals, those for $5 million and under.

For bigger deals, such as the $120 million the Montelucia's German bank is reportedly seeking for the resort, there are a couple obstacles: financing and agreeing on a price in this volatile market.

Tip of the Iceberg

This is indeed the tip of the iceberg. Moreover, places like Phoenix where no one in their right mind would want to go in the Summer, Spring, Winter, or Fall are going to be especially hard hit.

Yes, I am biased against Phoenix. I am not fond of dust storms, blazing hot treeless conditions, flat barren desert, or any other Phoenix attractions except when there are Spring rains every 5th year or so and the desert blooms.

When there are Spring rains, I highly recommend camping in places like Picacho Peak State Park.

Note: the pictures in that link are god awful. Then again, that is how the place looks most of the time. I have some tremendous images of the park in full bloom. Unfortunately they are slides and my slide scanner does not work with a recent Microsoft Vista upgrade so you have to take my word for it.

Others might feel Chicago is god awful, especially in the Winter. The important point is, no matter where you pick, travel is down, and travelers are making do with less. Camping is in, hotel rooms are out. Traveling far is out. Traveling close by is in. Eating out is out. Backyard barbecues are in. By the way, inquiring minds might be interested in the origin of the word barbecue.

Barbecue is from the French barbe à queue when goats were roasted on a spit from the beard (barbe) to to the tail (queue). Some disagree as to the origin, but that works for me.

At any rate my advice for the rest of the summer is skip the hotel and go camping. I am back from a weekend of camping, posting at night from a closed bagel shop on the hood of my car with lights from the Little Caesars Pizza place next door. The bagel shop left its WiFi going all night and I took advantage.

Those who see hyperinflation coming, need to ponder the implication of multiple aspects of this post and think again.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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