Hospitality Crystal Balls III

The Wall Street Journal reports on the first major default by a condo-hotel developer. According to Standard and Poor’s credit analysts Chicago developer Robert Falor, who had plans to convert hotels in Miami and Chicago into condo-hotels had defaulted on loans to both projects. Last year, Mr. Falor had taken out $135 million in loans to purchase and convert 130 units of the 417-unit Royal Palm Crowne Plaza Hotel in Miami. He has missed payments for his mezzanine and first mortgage loans. His mezzanine lender, an affiliate of BlackRock of Pittsburgh, made the payments and could end up owning the property. In the Hotel 71 project in Chicago, the mezz debt was the only one that was missed which probably means the LA based hedge fund and private-equity firm Oaktree Capital Management LLC could end up with the hotel.

Are the two defaults indicative of a broader trend? Apparently not, based on lenders’ appetite for condo-hotels which remains strong as ever. That at least the conclusion of a PWC survey which notes that developers are continuing to put up condo-hotels at a fast clip. Approximately 13% of urban hotel projects being developed in the U.S. residential element. For the upscale market that heads north of 20%. But like all economic cycles this is no different – demand has to taper off as supply continues to grow even in cities like New York demand is not inelastic – that is a concept associated with salt not hotel rooms. A look at a WSJ excerpt below on the hotel industry in 1996 is instructive:

“Yet another survey shows that the hospitality industry, buoyed by higher room rates, gains in productivity and better management, is headed toward record profits in 1996. In its annual report on the industry, PKF Consulting in San Francisco predicts U.S. hotels will have an average operating profit
margin of 25% next year, up from an expected 24.5% this year. Occupancy is also scooting up, causing some corporations to scramble for meeting space, says Human Resource Executive (a trade magazine). Coopers and Lybrand’s Bjorn Hanson points out that a strong leisure market coupled with a busy
fall-meetings season together add pressure for rooms. Both PKF and Cooper expect the occupancy growth pace to slow down the road as hotels add rooms, cementing their recovery from the recession in the early 1990’s.”

By 2001, before the terrorist attacks, the industry was headed for a slowdown. The attacks and the war in Iraq made the oncoming downturn considerably deeper. Fourth quarter ’07 and early 2008 look fairly certain to bring in those menacing dark clouds of (yet) another downturn.

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Vijay Dandapani

Co-founder and president of a New York based hotel company for 24 years. Grew the firm to five hotels in Manhattan and also developed a greenfield project at MacArthur airport, New York. Speaker at numerous prestigious forums including Economy Hotels World Asia, Lodging Conference, NYU, Columbia University Real Estate Roundtable, Baruch College's Zicklin School and ALIS. President and ceo of New York City Hotel Association since January 2017.