Where are we in the hotel default cycle? About the front left tire. A better analogy than baseball innings is the video we’ve all seen of crash testing a car. Slowly the bumper touches the barrier, then starts to crumple, then the hood cones, and the tire distorts..and that’s where we are now- hotel defaults at 25%. Most servicer experts are saying second or third inning.
But that analogy leaves out the human element…the passenger.
Pay careful attention- the dummy doesn’t immediately lurch forward- not until the impact has gone to the windshield…then WHAM! So we are not yet to the WHAM! part. But fast approaching.
Borrowers are running out of gas- they have been holding on for a long time. AND revpar is still DECREASING in many markets. AND franchisors are starting to demand cap ex. AND maturities are building. Servicers should expect hotel defaults and foreclosures to ramp up in September…WHAM!
Chew on this- recent hotel sales are producing a likely second asset bubble. Several recent transactions demonstrate large overpayment and potential problems later. Sales prices are 25 to 35% above what most industry veterans would pay. The buyers- private equity funds with commitments expiring (got to get the money out the door now) and virgin IPOs who have to show acquisitions this year.
The full service hotels are in major markets and priced $20-80M. So if you are a special servicer or lender with REO now MIGHT be a good time to sell before the early buyers run out of cash. (And no I was not paid by the starving hotel brokers to say this). To “maximize net present value to the trust” a sale now might be preferable to advancing cash for two years and then selling.
This Double Bubble also is emerging in retail where my friends tell me of transactions where they bid $90M and the winner is at $135M or smaller deals where they bid $800k and buyer pays $1.5M Remember anyone not currently on Social Security has never lived through economic times like these.