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California's Hotel Industry

Hotel foreclosures quadrupled in California in 2009

Nadja Brandt  Jan 07, 2010

Hotel foreclosures in California more than quadrupled last year as business travelers and vacationers cut spending and commercial real estate values plunged, forcing owners into default, according to a survey released today.

There were 62 foreclosures on hotels in the state last year, compared with 15 in 2008, Irvine, California-based Atlas Hospitality Group said in a statement. Properties in default jumped almost six-fold to 307, said Atlas, which specializes in selling hotels. The survey only covered California.

Lodging owners are struggling to make debt payments after adding rooms and properties from 2004 to 2007, when financing was easy to come by because banks bundled the loans into mortgage-backed securities and sold them to investors.

“In California and nationwide, a lot of owners are dipping into their own pockets to fund the negative cash flow, and they are running out of money,” Alan Reay, president of Atlas Hospitality, said in a telephone interview. “Hotels are being foreclosed on and reselling at very low, low prices. A lot of people question if they should keep paying. As bad as the numbers look right now, it’s going to get a lot worse.”

About 1,200 loans totaling $28.2 billion and backed by 1,800 U.S. hotels were included on a performance watch-list by Realpoint LLC as of the end of December. The list includes loans in default or at risk of default, according to the Horsham, Pennsylvania-based credit-rating company.

Los Angeles Marriott

The largest hotel to be foreclosed on was the 469-room Marriott in downtown Los Angeles, Atlas said. The Marriott International Inc. hotel may be sold to an unidentified Chinese investor for $60 million in cash, industry newsletter Real Estate Alert said last month.

LA Hotel Venture LLC, which bought the property for $115 million in March 2007, filed for bankruptcy in April to stave off foreclosure. The petition listed as much as $100 million in assets and as much as $500 million in debt.

About 81 percent of troubled California hotel loans originated between 2006 and 2007, Atlas said.

Occupancy in the top 25 U.S. travel markets fell to 61 percent through November from 67 percent a year earlier, according to Smith Travel Research in Hendersonville, Tennessee. Average daily rates slumped 12 percent during that period compared to the prior year and will likely drop 3.4 percent in the U.S. in 2010, according to Smith Travel.

“We’re not going to hit bottom until we stop seeing revenue declines,” Reay said. “The latest November numbers still show double-digit declines in many of the top 25 markets. That’s a problem. We were looking at November as the bottoming- out month. Unfortunately, this was a bad surprise.”

Riverside, California, outside of Los Angeles, had 10 hotels in foreclosure last year. San Bernardino was home to seven and Los Angeles had six, Atlas said. Los Angeles had 33 hotels in default and San Bernardino had 30, Atlas said.

Hotel foreclosures quadrupled in California in 2009
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Source: Bloomberg

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