MSNBC’s website ran an article earlier this year with the somewhat misleading headline “New York hotel deals for next to nothing”. The “next to nothing” rates included “a mere $89 for an overnight at a nifty Upper West Side hotel to the fabled Algonquin for just $249 per night”. However, with no let up in the drum beat of bad news in the financial markets it is entirely possible that the steady rise in room rates may be halted with some probability of a decline resulting in some real hotel deals.
Indicators that point to pressure on room rates include today’s Wall Street Journal reports that “After suffering a beating from their exposure to home loans, banks and securities firms are about to take their lumps from office towers, hotels and other commercial real estate. And the losses could last longer than those from the sub-prime shakeout”. One reason for the pessimism having infected the commercial mortgages is that there is “problem with leftovers. – the firms’ own holdings of leftover, unsold commercial-mortgage-backed securities”. Those making the list of leftovers include “a group led by Bear still is trying to sell the debt offered to Blackstone Group LP for its $20 billion takeover of Hilton Hotels Corp. In December, Moody’s cut its ratings on Bear, partly blaming the firm’s “concentrated risk” from the Hilton deal”. The Blackstone Hilton deal was completed nearly a year ago and the fact that Bear still has the debt on its books is obviously a significant negative for the bank but also is indicative of the overhang in the market.
Warren Buffet’s definitive pronouncement of a recession despite the fact that the financial numbers do not meet the economic criteria that formally define a recession does not help either.
For New York City, where overall rates have climbed up despite a decline elsewhere in the country thanks in no small part due to the fast depreciating dollar, the addition of a significant number of rooms combined with an economic slowdown may finally result in lower rates and occupancy – a prospect that ought to be sobering for the city’s hotel operators.