When the US economy began the recent downturn and the bottom dropped of the hotel market, some experts forecasted that things were so bad in the lodging business that in the coming three years there would be twenty-five hundred foreclosures of lodging properties in California. Of course, everyone panicked. In the past three years this projected disaster has not been nearly as bad as some predicted. In that time there have been well under five hundred lodging properties in California that have been foreclosed on. Even better news is that defaults of lodging properties in California are continually decreasing and in the six months ending March 31, 2012 only thirty lodging properties in California had received NODs (Notice of Defaults) filed against them.
In today’s economic conditions, a good many of those lodging properties in default will be able to work through those defaults with the existing lenders and will never be foreclosed on. Extrapolating these thirty defaults out on an annual basis would mean 60 hotels, motels and B&Bs going into default out of over 10,000 lodging properties in the state. This means that well under one-tenth of one percent of the lodging properties are currently in default. During the worst part of the lodging property fiasco over the past three years we saw less than five hundred foreclosures of lodging properties in California. While that number is a significant increase from the normal amount of ten to fifteen defaults, this is a far cry from the 2,500 defaults that were previously predicted by others in the lodging community.
Hopefully, this relatively small percentage of hotels and motels in default signifies a turnaround in the lodging business and supports the contention that we are gradually coming out of the worst market in the past fifty years. Another indication of an uptick in the market is a confirmation from large banks (some of whom previously had an entire division devoted to handling their many defaults on hospitality loans) state that they currently do not have any defaulting lodging properties in their portfolios. Joey Larsen, Chief Portfolio officer for Resource Capital in Sacramento (a large and very active SBA CDC lender) states that while they still have a few lodging loans in default, the number is down by 50% for the first quarter of 2012 compared to the same period of 2009.
Rich Grant of TMC capital in San Francisco says his defaults from the past six months ending March 31 2012 were 80% less than the same period ending March 31, 2009. He currently has only one loan for a lodging property in default; he had six loans in default for the same six months ending March 2009.
This also means a significant change in the overall market conditions in that the winter season is historically the slow season for California hotels. The desert areas enjoy a strong winter season, but for the majority of California hotels and motels, the winter is the slowest season. Winter is generally the time that a lodging property goes delinquent on loan payments. Now that the lowest income months are behind us for 2012, we can expect fewer defaults for the year.
We are also seeing some areas of the state showing increased gross room income of 25% to 30% for the first three months of 2012, well ahead of the same period in 2011. This means that with incomes rising, the few hotels and motels that are currently in default (or close to it) will have a much better chance of completing a workout with their lenders to save their properties.
The decrease in the issuance of Notice of Defaults, anecdotal evidence of fewer defaulting loans in lenders’ portfolios and reports of first quarter increases in room revenue, add up to a positive picture of the lodging industry. This is certainly a welcome trend after several years of hardship for an industry that contributes considerably to the overall health of the state’s economy.
Howard Mathews of National Hotel Motel Brokers has handled hundreds of lodging property sales and more than a dozen workout situations for lodging properties in default. Howard can assist you in all types of lodging real estate transactions. He can be reached at 925 634-2299 or firstname.lastname@example.org