Hotel Workout Services favor Demand, ADR and Low Construction

The recent report by PKF Hospitality Research on increased demand, coupled with higher average rates, suggest from our viewpoint that hotel workout services may be favored by banks with non-performing hotel loans in the coming months. Added to that is the report from STR on construction starts being now predominately low, which suggests values will continue to inch up and troubled hotels may be more appealing to investors. Both of these factors will give banks and lenders pause about foreclosing at least in the long term.. For example, “PKF Hospitality Research (PKF-HR) forecasts that the demand for U.S. hotel rooms in 2011 will increase a solid 4.9 percent, while the average daily room rate (ADR) paid by guests will rise a modest 2.4 percent.” This combination of events in their report and our experience from a hotel workout services standpoint suggests RevPAR will continue to rise. This also provides to a more marketable hotel real estate sale to private equity investors and another option. Consult our prior blogs on alternatives to the hotel consulting and restructuring process. On the issue of new construction in the pipeline by this hotel expert prediction, “The total active U.S. hotel development pipeline comprises 2,967 projects totaling 317,941 rooms, according to the June 2011 STR/McGraw Hill Construction Dodge Pipeline Report. This represents an 11.4-percent decrease in the number of rooms in the total active pipeline compared to June 2010.” If the economic signs keep pointing to a recovery in the lodging industry, albeit a slow one, there will be more motivation to keep servicing the loan rather than take back the property and attempt to sell it. Of course, there may be other uncertainties in the hotel workout services plan to consider. One is whether that non-performing hotel asset is part of the FDIC program to clean up a particular bank’s balance sheet. In that case, the above increases in RevPAR and lower new supply are ideal times to foreclose and hold a lodging property. This is because the normal course of economic improvement will slowly correct any income loss and eventually allow a probable higher sales price in the near future.