Read it today in the Wall Street Journal- top paragraph left hand side… “IF THE ECONOMY RECOVERS AS ANTICIPATED AND BERNANKE MOVES TO RAISE THE INTEREST RATES…”  If that happens then all the nightmares about floating rate hotel loans will come true.  Hotel loan recovery is a race that will BEGIN when the economy turns around.  Then it will be a contest between rising interest rates and rising hotel demand AND HOTEL DEMAND WILL LOSE.  Hotel income (demand and rate) is projected to decrease (yes decrease) by 3-4% in 2010.  However, if the current LIBOR of 0.27% goes up just 280 basis points, as it did in the 1994 recovery, then most floaters will go from their current 2.75% to over 5.5%- an increase of 100%.  Or worse, during the 2004-2006 recovery, LIBOR went from 1.09 to 5.4, an increase of more than 430 basis points.  A reoccurrence of that will sink most floaters.

A compounding problem is the last part of the Wall Street Journal sentence “…and tighten credit”.  What credit?  For now there are no hotel loans (will some reader let me know if there are any hotel loans), therefore no transactions.  If credit tightens, it’s only worse for hotel values and hence recovery of loan principal.