Improved hotel outlook amid catastrophic foreclosures

There’s perhaps no better example of good news and bad news than an updated and optimistic new hotel report and a Bloomberg story on the “catastrophic” possible outlook for looming hotel foreclosures.

First, the good news.

The report by PwC US “shows that the momentum of the recovery in the lodging sector is expected to continue in 2012, despite an overhang of macroeconomic uncertainty. The improved outlook is in part due to the recent strength of business travel, which, despite greater uncertainty in the economic outlook, and resultant business and consumer confidence, has recovered strongly.”

Lodging demand during the third quarter exceeded the previous peak achieved in the first quarter of 2006 by 3.1 percent.

“This recent strength in demand recovery is expected to continue to drive revenue per available room (RevPAR) growth in 2011 and 2012. PwC's updated lodging industry forecast now expects RevPAR growth of 7.8 percent and 6.5 percent in 2011 and 2012, respectively,” the report says.

But on the other hand, there will be a “huge increase’” in hotel foreclosures next year as debts come due and little financing is available, said Robert Sonnenblick, a hotel developer.

The wave of commercial mortgage-backed securities needing replacement debt “is going to be a close-to-catastrophic problem,” Sonnenblick told Bloomberg.  “The end result of all of this is you’re going to see a huge increase of hotel foreclosures.”

About US$21.7 billion in commercial mortgage-backed securities on 232 hotels are coming due in the next 12 months and need to be refinanced, according to Realpoint, a securities ratings firm.

High-end hotels in major US cities such as New York, Boston and San Francisco have fared best during the recovery, according to Bloomberg. The occupancy rate was 71 percent for the highest-priced segment of the hotel market this year through September, compared with 62 percent for all US hotels, according to Smith Travel Research Inc.

While bookings are up, financing remains the biggest impediment to hotel sales and construction, according to Jason Pomeranc, co-owner of Thompson Hotels.

The potential for foreclosed hotels to hit the market is discouraging lenders from financing new construction, said Ian Schrager, chairman of Ian Schrager Co.

By David Wilkening