AN AWFUL WEEK IN A BAD HOTEL YEAR
By Joe Brancatelli
December 10, 2009 -- This has been a year to forget for the overbuilt, under-occupied hotel industry, and this has been the worst week ever in the year to forget.
Hotels from coast to coast fell into foreclosure or went under the auction hammer, and a major hotel operator defaulted on another clutch of hotels and may abandon the properties. Perhaps most alarming of all for lodging watchers is the fact that the biggest crashes are coming at the high-end hotels and resorts once thought to be immune to economic downturns.
"The bad news about this week is that it's going to get worse next year," the chief operating officer of a major hotel chain said. "Occupancy rates are so low and the [nightly rates] we're getting for the rooms we are selling are so low that a lot of owners will have no choice but to walk away next year."
The week started with the news that Morgans Hotel Group, the lodging chain best known for ritzy boutiques like the Royalton in New York, Sanderson in London, and the Delano in Miami, has given up on its Arizona outpost. Morgans months ago stopped paying on its $40 million mortgage and mezzanine loans on the Mondrian in Scottsdale and has been trying to restructure the property's debts. Negotiations failed, however, and Morgans said Tuesday that it is prepared to surrender the property to lenders.
Also this week, the complicated $400 million underpinnings of the two-year-old Gansevoort in Miami Beach collapsed. Despite all of the buzz generated by the 334-room oceanfront hotel, Credit Suisse announced it would soon auction the ownership stake used to secure an $89 million mezzanine loan.
In New York, the 270-room W Hotel on Union Square was auctioned off for just $2.1 million. Just three years ago, Istithmar World Capital, an arm of the financially stressed Dubai World, paid $282 million for a 90 percent interest in the trophy hotel. It even spent $4 million more in June to acquire the remaining stake in the property.
Want more? It was revealed this week that the lender for the Ivy, considered the best hotel in Minneapolis, wants to foreclose on the 136-room property. Open less than two years, the hotel has slashed rates and replaced its management, but hasn't been able to fill rooms or sell many of its 72 condominium units. Contractors have filed a blizzard of liens seeking payment for their work on the $88 million project, and the lead lender, Dougherty Funding, says the project's developers owe $56 million on $69 million worth of loans.
Finally, Sunstone Hotels disclosed that it had defaulted on a $246 million mortgage covering 11 hotels with 2,500 rooms. That's a quarter of publicly held company's portfolio of 40 hotels. Sunstone says it wants to restructure its loan with Massachusetts Mutual Life Insurance, but "may elect to surrender the hotels to the lender or cooperate with the lender’s appointment of a receiver."
That's no idle threat: This summer Sunstone walked away from a $65 million loan on the W Hotel in San Diego and handed the 258-room property back to its lenders.
Sunstone's San Diego move was the result of a calculation that more and more hotel and resort owners are making: They owe more on their buildings than they are currently worth in this depressed real estate market. Worse, the hotels aren't even generating enough revenue to cover mortgage and other monthly loan payments.
With nationwide lodging occupancy below 60 percent, average nightly room rates 20 percent or more below their 2007 highs, and real estate value in free fall, "a lot of hotels don't make financial sense anymore," one general manager says.
ABOUT JOE BRANCATELLI Joe Brancatelli is a publication consultant, which means that he helps media companies start, fix and reposition newspapers, magazines and Web sites. He's also the former executive editor of Frequent Flyer and has been a consultant to or columnist for more business-travel and leisure-travel publishing operations than he can remember. He started his career as a business journalist and created JoeSentMe in the dark days after 9/11 while he was stranded in a hotel room in San Francisco. He lives on the Hudson River in the tourist town of Cold Spring.
THE FINE PRINT This column is Copyright © 2009 Condé Nast Inc. All rights reserved. Reprinted with permission. JoeSentMe.com is Copyright © 2009 by Joe Brancatelli. All rights reserved.