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Hotel Loan Performance In A Rapidly Deteriorating Market

In a declining economy, commercial real estate investors want long-term leases, low tenant rollover, low expense ratios and the ability to pass along increasing operating expense to tenants. Hotel properties have none of these features.

Predicting hotel performance over the next 12 to 18 months is like juggling chainsaws while riding a unicycle. In mid-2008, as the economy began to stall and the reality that a recession had already set in, forecasts for 2008 revenue per available room (RevPAR) growth finally moderated from approximately 3% to 0%. Only in January 2009 was it revealed that even this flat RevPAR assumption was overly optimistic. According to Smith Travel Research data, while RevPAR gains were seen in the first two quarters of 2008, the second half of the year was decidedly negative. Most telling is that RevPAR decreased 9.8% in the fourth quarter compared with the same period in 2007.

Given the inability so far for most individuals to grasp just how bad the economy is and how bad it will get, it would not be surprising to see RevPAR decline by well over 10% in 2009. As an early indicator, Smith Travel Research's weekly updates on national RevPAR changes are an ominous sign. In the eight weeks ending February 21, 2009, RevPAR declined a staggering 17% compared with the same period in 2008. But, in the end, what does this mean?

Hotel properties operate at relatively high expense ratios compared with other commercial property types.

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