Hard Times Send Hotel Industry into Survival Mode

USA Today

Neil Cornelssen says he misses the free cookies in the evening at one hotel and the daily newspaper outside his door at others.

He's also noticing that bath towels in a growing number of hotel rooms are shabby and need to be replaced.

Cornelssen, a sales manager in Marlton, N.J., is one of many frequent travelers who say they see the tangible effect that the recession has had on the nation's hotel industry. Among them: run-down rooms with fewer bathroom amenities, closed club lounges, fewer concierge staffers, slow room service, reduced hours at restaurants and bars, and infrequent airport shuttles.

"The unfortunate reality of today's marketplace," says Hotels magazine Editor-in-Chief Jeff Weinstein, is hotels are "more focused on saving cash than delivering the best service."

Hit by a declining demand for rooms, low room rates and plummeting revenue, hotel companies have laid off hundreds of thousands of employees and are struggling to maintain quality. A record number of hotels are defaulting on mortgage payments. Hundreds have been taken over in foreclosures, and some have closed or are about to.

"Because of the recession and the credit bust," says Ed Watkins, editor of the trade publication Lodging Hospitality, "it's the worst downturn in decades — perhaps ever."

As a result, says Robert Habeeb, president of Chicago's First Hospitality Group, which operates 40 hotels in eight states, "The industry is in survival mode."

The toll on the industry is told by startling numbers:

•In January, U.S. hotels had a record-low 45.1% occupancy rate — the lowest January rate since industry statistician Smith Travel Research began tracking data in 1987. Last year's rate — 54.8% — was the lowest ever recorded by the company.

•About 400,000 U.S. hotel employees were laid off during the past two years, says Joe McInerney, president of the American Hotel & Lodging Association. About 1.6 million hotel and motel employees remain, according to the most recent Bureau of Labor Statistics data.

•New hotel construction has declined significantly, reducing hotel companies' opportunities to grow their brands and increase revenue, says Mark Woodworth, president of Atlanta-based PKF Hospitality Research. Construction began on 78 new hotels in last year's fourth quarter, compared with 158 during the same months in 2007, according to Smith Travel Research.

•The total property value of U.S. hotels has fallen by up to 50% from its peak in 2007, according to Fitch Ratings, which provides ratings and analytical commentary to the world's credit markets. Such a drop has limited the ability of owners to sell hotels and improve their credit profiles, Fitch Ratings says.

•A record 15.7% of securitized hotel mortgage loans were delinquent at the end of last month, according to Trepp, which tracks commercial real estate loans. Securitized loans represent about a quarter of hotel loans.

In California alone, 330 of the state's 10,000 hotels have defaulted on mortgage payments since the start of 2009, says Alan Reay, president of Atlas Hospitality Group, a research and marketing company in Irvine, Calif.

Reay says 76 hotels in California and about 500 nationally have been taken over by lenders in foreclosure since the beginning of 2008. Most have continued to stay open for business.

"Banks don't want to take back the keys to distressed hotels in most situations," says Paul Heney of the trade publication Hotel & Motel Management. "They seem to be doing everything they can to negotiate with the ownership groups — to ride out the rest of this economic stress."

Closing a hotel is a huge risk, Heney says. Some believe "that the day a hotel closes its doors, it is worth 50% of what it was worth the day before," he says.

Some high-profile closures

Upscale hotels have been hit hardest, and some have closed.

The W Hotel in San Diego was turned over to lenders in September after its owner, Sunstone Hotel Investors, defaulted on a $65 million loan payment.

The Wyndham Drake in Oak Brook, Ill., closed a month later.

The Drake had "about $3 to $5 million in deferred maintenance when it was shut down," says Ted Mandigo, a hospitality consultant in Elmhurst, Ill. "It was struggling for occupancy and at a negative cash flow."

On May 2, The Ritz-Carlton, Lake Las Vegas, in Henderson, Nev., will close because of a decline in business, says Vivian Deuschl, the chain's vice president.

Meetings business decreased at many luxury hotels, Deuschl says, after Congress scolded insurance giant American International Group for spending about $400,000 at a luxury California resort following an $85 billion federal bailout in 2008.

Budget and non-luxury hotels haven't escaped the downturn.

Sunstone, which owns various Marriott, Hyatt, Hilton, Fairmont and Starwood hotels, has turned over 13 other hotels to lenders. They include the Renaissance Westchester in West Harrison, N.Y., the Marriott Ontario Airport in Ontario, Calif., the Hilton Long Island/Huntington in Melville, N.Y., and the Holiday Inn Downtown in San Diego.

Citing decreased business-travel spending, Extended Stay last June filed for bankruptcy court protection with a debt of $7.6 billion. Its 684 hotels, which cater primarily to guests staying at least 18 nights, remain open. The company has five hotel brands: Extended Stay America, Extended Stay Deluxe, Homestead Studio Suites Hotels, StudioPLUS Deluxe Studios and Crossland Economy Studios.

Despite the industry's deep financial woes, William Marks, managing director for San Francisco-based JMP Securities, says he doesn't believe the industry has been permanently altered.

"We are just experiencing the cyclical nature of the industry," he says. "Unfortunately, this is a more powerful downturn than normal."

More cuts, fewer upgrades

To cut costs, hotel employees now perform a variety of tasks, says Roberta Nedry of Hospitality Excellence, which provides service training for hotel employees. Some brands have replaced experienced concierges with lower-paid, inexperienced ones.

Hotels also have become more vigilant about turning off lights and lowering thermostats, and are closing wings or floors when occupancy is down, First Hospitality's Habeeb says.

Renovation and upgrades are being delayed, says Heney of Hotel & Motel Management.

"Many hotels just can't go through with upgrades, say to flat-screen TVs in guestrooms, as soon as they'd hoped," he says. "A room may not see new furniture but instead get new bedding, lighting and the like."

Hotels' food-and-beverage operations have also had to adjust.

Noticing a drop in corporate travel and spending, two San Antonio hotels — the Omni La Mansión del Rio and the Watermark Hotel & Spa — increased advertising to local residents.

"We were able to draw on new business that at one time may have been overlooked by our properties," says John Brand, the hotels' executive chef.

Managers at the Barona Resort & Casino in Lakeside, Calif., began noticing two years ago that guests were spending less on food and beverages, and dining more at the resort's less expensive restaurants.

Guests began sharing appetizers, skipping appetizers and dessert and ordering a glass instead of a bottle of wine, says Duncan Firth, a chef and restaurant manager at the resort.

In response, the resort instituted discount menus and half-price entrees for some gamblers. This month, one of the resort's restaurants is offering a $9.99 prime rib dinner and bringing back a 10-year-old menu "with prices to match," Firth says.

The opposite may be occurring at some revenue-starved hotels.

Kansas-based business traveler Robert Bender, chief architect for a technology company, says he's seen a big increase in food and beverage prices at hotels.

For guests: Low rates

In January, the average daily room rate in U.S. hotels was $93.93, a drop from $106.54 in January 2008 and the lowest for the month since 2005, according to Smith Travel Research. Similarly, the average room rate for all of 2009 — $97.68 — was the lowest since 2005.

Though the travel industry expects the number of travelers to increase this year, hotel experts don't foresee rates rising quickly.

"Despite early signs of a recovery toward the end of last year, few properties expect to raise prices," says Scott Booker, vice president of Hotels.com. "This could be another year of significant values for both business and leisure travelers worldwide."

Hotels "took a beating" during last year's fourth quarter from corporations demanding rock-bottom room and meeting rates for employees, says Jeff Higley of HotelNewsNow.com, an online trade publication.

McInerney, the president of the hotel trade group, acknowledges the difficulties negotiating in a buyer's market. But he says the country is slowly coming out of recession, and he sees "a little light at the end of the tunnel."

Executives of big hotel companies also see positive signs.

Though Marriott International had a 38% revenue decline and a $346 million loss for 2009, CEO J.W. Marriott last month said the fourth quarter's $106 million profit "exceeded our expectations" and returned the company to profitability.

Marriott said leisure travelers responded to "aggressive marketing campaigns," and business travel "showed signs of improvement." The company opened 38,000 rooms, trotted out two new brands, Edition and the Autograph Collection, and reduced debt by nearly $800 million in 2009, he said.

Matt Avril, hotel group president of Starwood Hotels & Resorts, says his company cut its debt by more than $1 billion and opened 83 hotels last year. Starwood has nine brands, including Sheraton, Westin and W Hotels.

Avril says the company, which lost $107 million in the fourth quarter, has seen a rebound in leisure and business travel, and has emerged from the recession "a battle-tested and more mature organization."

Watkins of Lodging Hospitality says that unlike the economic downturn in the late 1980s, when the industry operated at a loss, it's expected to turn a profit this year and in 2011.

That's possible, Watkins says, because the industry today is more disciplined, "dominated by large companies and savvy entrepreneurs" who are "more sophisticated in marketing and operational techniques."

"Times are tough," he says, "but many hotel owners are measuring that by the fact they can only order a new Mercedes every other year instead of every year."

Commercial Real Estate Losing Commercial Potential
Story from Yahoo! News

When the housing market began collapsing across the developed world, commercial real estate remained a bastion for builders. But now the global recession is dragging it down, too. Central business districts that only a year ago were crowded with construction projects are emptying out as office tenants cut staff and operations. Building values are sinking, while delinquencies on securitized loans have tripled in the past six months.

The abrupt downturn in commercial real estate is punishing cities as varied as Detroit, Dallas, and Hartford, where downtown office vacancy rates top 20%. Unoccupied space is piling up quickly in San Antonio, Las Vegas, Charlotte, and San Jose. Outside the U.S., high-profile towers have been halted everywhere from Dubai to Santiago, Chile.

New York, though, may be the epicenter of the bust. The world's biggest office market, with roughly 350 million square feet of floor space, New York added 2.9 million square feet of vacant property in 2009's first quarter alone -- more than the entire Empire State Building. In that same period, calculates commercial real estate brokerage CB Richard Ellis (NYSE:CBG - News), rents slid 14.6% to an average of $57.35 per square foot, the largest quarterly drop on record.

At 8.5%, New York's office vacancy rate is still well under the U.S. average of 14.7%. But with virtually no demand for new space, that percentage is likely to hit double digits within months, putting New York's recovery well behind that of cities such as London, where some analysts and investors think the worst may be over.

Tenants Wanted

Steven J. Pozycki could add to the glut in New York next year. Pozycki, founder of SJP Properties in Parsippany, N.J., is plugging away at a 40-story tower in Midtown Manhattan with 1.1 million square feet of space. The $1 billion project, a joint venture with Prudential Real Estate Investors, was started in early 2007, when property values were still soaring and vacancy rates were at all-time lows. It is scheduled to open next spring but has yet to find a single tenant.

The developer had intended to anchor his building, known as 11 Times Square, with financial companies and law firms. After these would-be renters began teetering, several other developers canceled projects at earlier stages. Boston Properties (NYSE:BXP - News) called off plans for a nearby tower in March. A few weeks later, developer Larry Silverstein said he may delay construction at the World Trade Center site for decades. But Pozycki says that by last fall construction on his site had gone "past the point of no return."

The slide in the office sector mirrors trouble throughout the nonresidential real estate industry. On Apr. 16, General Growth Properties (GGP.), the nation's second-largest mall operator, with 200 shopping centers, filed for bankruptcy. MGM Mirage (NYSE:MGM - News), which is erecting an $8.6 billion complex of stores, offices, hotels, and a casino on the Las Vegas Strip, came close to default this spring. In New Orleans, a $400 million Trump International Hotel & Tower is now on hold until the credit market rebounds.

With homebuilding moribund -- the sector is at its weakest in 50 years -- it's no surprise the U.S. has been shedding more than 100,000 construction jobs a month since December. Meanwhile, new assignments for architecture firms have become all but nonexistent, forcing big names such as New York's Daniel Libeskind to trade down to designing doorknobs and light fixtures.
Putting Work on Hold

Office construction is skidding outside the U.S., as well. Work was halted in March on a Cesar Pelli-designed skyscraper in Santiago, Chile. Building has reportedly stopped on Norman Foster's Russia Tower in Moscow. And many Persian Gulf projects that were green-lighted when oil topped $100 a barrel have been shelved, including the kilometer-high Nakheel Tower in Dubai. "We've had several projects in Dubai that have basically been put on hold until further notice," says Daniel Kaplan, a senior partner at architecture firm FXFowle.

The financial impact will spread. The commercial real estate debt market in the U.S., valued at $3.4 trillion, is three times larger than it was in the early 1990s, creating the potential for huge losses as defaults and bankruptcies rise. Already, delinquencies on commercial mortgage-backed securities have jumped from $3.48 billion in February 2008 to $11.99 billion a year later, and a report from Deutsche Bank (NYSE:DB - News) forecasts they will swell to at least $24 billion before 2010. "It's like subprime," says Richard Parkus, head of CMBS research at Deutsche Bank. "Knowing what's in the delinquency pipeline, we can predict a dramatic rise in defaults."

The expected upsurge is due, in part, to timing. A huge share of commercial mortgages was taken out in the mid-2000s, when building prices were rising to record highs and the loan-to-value ratio was around 90%. Many must be refinanced this year. These days the maximum loan-to-value ratio has fallen to 65%, while property values are plunging. On Mar. 31, for example, the John Hancock Tower in Boston was auctioned off for $660 million -- half the amount a private equity firm shelled out for the property three years ago.
London, Harbinger of Hope

Of course, real estate is a cyclical business. Many of today's troubled office markets were hurt badly in the U.S. recessions in 1990 and 2001. But within a few years, as a halt in construction constrained supply, and businesses began to require more space, vacancy rates shrank, rents climbed, and developers started breaking ground on new towers and Philadelphia apartments.

Some real estate brokers are looking to London for signs of a turnaround. Prices there may be stabilizing after falling nearly 30% in 2008. As a result, equity buyers are emerging to snap up deals, encouraged by the weaker British pound. Hessam Nadji, director of research at real estate brokers Marcus & Millichap, thinks the U.S. may be less than 18 months from leveling off, too. "If there's moderate economic stabilization," he says, "we could see that translate into new demand for commercial office space in mid- or late 2010."

Should that happen, Pozycki's SJP might be positioned well. None of its properties has a loan coming due in the next year or two. Most of the Midtown office buildings that 11 Times Square is competing with date to the mid-20th century. And no other towers are expected to open nearby before 2014. He also has plenty of space.

Expanding Eateries Target Shuttered Sites
Originally Posted to the Wall Street Journal

As restaurant chains go out of business or prune their store counts in the tough economy, competitors are jumping on the opportunity to move into the vacated locations as a way to expand quickly and cheaply.

Restaurants can convert their competitors' closed sites to their own brands at a lower cost than building new restaurants from scratch, industry executives note. Incoming businesses also have the upper hand in negotiating rents with landlords stuck with empty restaurant space.

"You definitely have the bargaining power because you have all the vacancies, and landlords are aware of that," says Navin Nagrani, vice president of Hilco Real Estate LLC, which specializes in real-estate restructuring.

Buffalo Wild Wings Inc., a sports-themed bar chain based in Minneapolis, is one of the companies emphasizing conversions as it expands. Over the past two years, it has acquired eight Don Pablo's restaurants and turned them into new versions of its sports-themed bar chain. As of the end of the year, Buffalo Wild Wings had 560 sites.

[ Photos: Buffalo Wild Wings took over a Don Pablo's restaurant, above, in Fort Worth, Texas, converting it into a Buffalo Wild Wings that opened July 28, 2008. ]

It has also put in place a rebranding "SWAT Team" of construction, operations and other professionals who can take a vacated site and convert it in just a little more than five months.

Giving Buffalo Wild Wings a boost in pursuing the locations is the chain's balance sheet. "We don't have any debt and we have cash on the book so these are the kinds of opportunities that we can take advantage of" and the competition often can't, says Matt Brokl, a vice president and associate general counsel.

Conversions cost the chain at least 20% less than building a new restaurant from scratch, which can take up to 13 months, Mr. Brokl says. Others estimate the savings can be even greater. Gene Baldwin, a partner with the restructuring firm CRG Partners LLC, estimates that moving into an existing site can cut development costs in half.

While the restaurant industry has been hammered over the past couple of years by a consumer-spending pullback, lower real-estate and development costs and lower rents have emerged as a tailwind for those chains still in expansion mode.

Panera Bread Co. has been negotiating with landlords to move into several former Bennigan's locations since the parent company of the bar-and-grill chain filed for Chapter 7 liquidation last summer, according to Mike Nolan, the fast-casual chain's chief development officer.

"Our experience says the best time to grow, all else considered, is during times of recession," says Mr. Nolan.

Burger King Holdings Inc. is breathing new life into some of the hundreds of Starbucks Corp. locations closed by the coffee chain in response to the economic downturn.

"Who would've thought five or six years ago that we would ultimately be able to take over a conversion of a Starbucks location?" Burger King Executive Vice President Russell Klein said at a recent investor conference.

And a Chili's Grill & Bar operator in Ontario, Canada, has already inquired about moving into at least two former Outback Steakhouse locations after the latter chain pulled out of the Canadian market last week, says John Reale, president of global business development at Chili's parent company, Brinker International Inc.

In the fast-food sector, which has held up better than full-service restaurants because of its lower prices, the credit crunch is one of the factors making more sites available for conversion. According to Hilco Real Estate's Mr. Nagrani, unprofitable fast-food locations are having a hard time selling their sites to other franchisees and shutting their doors instead.

Of course, not all chains are scouting closed sites and not every closed location is suitable for a new restaurant to move in. Chipotle Mexican Grill Inc., which plans to open as many as 130 restaurants this year, says it has found that many possible conversion sites are less than desirable.

"We're finding that people who are closing restaurants tend to close bad locations and keep the good ones," says Chris Arnold, a Chipotle spokesman. "We're not willing to make concessions."