More Distress RE for Investors and their Hotel Investment Advisors?

There were three important articles recently that suggest the long awaited distressed hotel deals for investors and their hotel investment advisors may or may not begin to increase in 2011 going forward based on your interpretation of the message. However, an important inference amongst all are that a large amount of distressed commercial real estate loans have yet to be fully dealt with either by the banks or the FDIC. The portions that I believe are important and could affect whether this often talked about distressed commercial real estate tsunami starts or not include the following: “The national office vacancy rate is now over 17%, and vacancies have also risen notably in the hotel and retail sectors as households cut back due to rising unemployment.” “Many banks, especially the smaller ones, still have overvalued real estate loans on their books that they are unwilling to sell at low market prices.” “On October 6, 2010, the International Monetary Fund or IMF released its latest appraisal of the situation for real estate on a global basis and the conclusion was that the prospects in the global real estate sector are “dismal,” with a downturn that could last eight years.”Real Estate News “Scary “shadow inventory” from foreclosures and delinquencies.” California alone may have 1,500 hotels in shadow inventory appears to be good barometer for the U.S. hotel industry.” “There is a disproportionate number of hotels operating under some form of forbearance agreement, which is creating a huge “shadow” inventory of distressed deals that are yet to hit the default market with estimates that this inventory is as high as 1,000 hotels in addition to the 529 in default or foreclosed.” “Some have criticized loan workouts as a policy of extend and pretend. But the restructuring of these commercial real estate loans around today’s cash flows and today’s interest rates may be preferable to foreclosure and forced sale of distressed property. If foreclosure yields the highest return, that would be the best option, though according to the FDIC.” “The recent Fitch Report said in September, hotel delinquencies in CMBS exceeded 21%.” The complete articles for investors and their hotel investment advisors can be viewed at these links: Overbuilding and High Debt Could Cause Real Estate to Obstruct Economic Growth for Years; Distress Continues for Hotels and Commercial Real Estate: New Data Suggests 8 year Downturn, Dismal Prospects and Increased Foreclosures; FDIC Chairman Bair Defends Extend and Pretend. This recent news about commercial real estate and hotels is parallel with other information we have seen in the last several month. Since it does appear certain solid investor parameters are still in limbo based on the continued uncertainty of the next 1-2 years, we are telling investors as their hotel investment advisors that a) office vacancies are synonymous with higher unemployment and the combination impacts growth in corporate and meeting travel, especially the ability for hotels to charge premium rates which impacts RevPAR, b) lenders extend and pretend policies will further limit any significantly reduced hotel real estate pricing (i.e. fire-sales) since banks and special servicers are limiting foreclosures and quick sell-offs which in turn has lowered available hotel inventory and raises demand, and c) the so-called “shadow inventory” should begin to surface for the acquisition and investment community once the hotel economic fundamentals improve, which all recent data suggests that hotel income will steadily increase in 2011 through 2013.