‘The Shining’ meets New York hotel market

In Stanley Kubrick’s cult classic film “The Shining,” a once-luxurious hotel paradise turns out to be a house of horrors that’s nearly impossible to escape.

Right now, it seems that New York’s hotel investment sector is having its Shining Moment. The hundred or so hotels developed during the last few years are beset by murderous debt levels, credit markets that prevent easy escape via refinancing and the specter of Depression-like economic troubles.

“For the first half of the year, people were hoping we would recover, or they could work out deals with the lenders,” said Bradley Burwell, a senior associate in CBRE’s Capital Markets Group for hotels. “May killed that hope, and June was not much better — and it’s finally gotten to the point where borrowers have run out of money.”

Though only one high-profile Manhattan hotel has become delinquent this year (the Dream Hotel at 210 West 55th), signs of distress are mounting. Burwell estimates that by the end of the third quarter — a full year into the accelerated economic downturn — more than half of New York City hotels will be in technical default on their loans, meaning the debtor has violated terms of the loan such as a minimum working capital requirement.

The hospitality market nationally is certainly getting hammered as hotels are defaulting at higher rates than other real estate sectors.

Those properties in technical default have found that the wildly rosy revenue expectations of the boom years have not panned out, and have been limping along by paying their debt with reserve funds. For their part, banks have had incentives to modify hotel loans rather than foreclose. Foreclosure leads to several messy problems, including a hit to profits from writing down the bad loan, a struggle to find a buyer for the asset and the headaches of actually running the hotel until a buyer is found.

“There are no transactions, and if you take it back, where are you going to sell it?” said Jeff Davis, executive vice president at Jones Lang LaSalle Hotels.

The worst is yet to come, sources said. In the third quarter, a brutal winnowing is expected to begin, separating firms that can afford to keep covering debt from sources other than operations from firms that can’t. As a result, Manhattan hotel experts and dealmakers forecast a series of transactions for distressed hotel development projects and properties through the end of 2009 and into early 2010.

“It’s going to get ugly,” said Alan Miller, senior director and principal at Eastern Consolidated. “Foreclosures haven’t quite happened yet; they’ve been avoiding the inevitable by extending these loans, but they are not filling these rooms at rates needed.”

With the hospitality firm PKF Consulting forecasting that 2009 revenue per available room at metro New York hotels will plunge 30 percent, hoteliers and lenders could face a worsening cash crunch. That means real defaults, when even lenders who want to forebear will not be able to, notes Jeff Bernstein, a partner at real estate investment bank Guild Partners.

“We’ll find that as soon as lenders become less cooperative, we’ll see a bunch of hotels trading,” added John Bralower, president of Carlton’s Hospitality Group.

Still, pricing deals is a problem, because it’s unclear where the bottom of this sinking market lies. The Fairfield Inn New York Manhattan/Times Square South sale in March to Gehr Development is widely regarded as the last major sale this year — and that transaction got started in 2008. There are, however, no widely accepted recent benchmarks for hotel deals.

Dealmakers are doing their best to hype Manhattan’s glittering hotel history as a factor to balance plunging values, but the numbers are grim. According to Burwell from CBRE, values are down 35 to 50 percent from the peak in early 2007, making loans worth 50 to 60 cents on the dollar.

That’s what buyers have been willing to pay for debt over the last year, but banks were trying to get 75 to 80 cents on the dollar.

“I don’t think banks and lenders in general have made up their minds if they are willing to accept that 50 cents on the dollar,” said Burwell. “They are just now beginning to explore it and come to the realization that’s what this is worth.”

Last month talk swirled of deep-pocketed private equity, institutional and international buyers sitting on the sidelines, eager to scoop up Manhattan hotels or development deals for a relative pittance. But it remains unclear who has the interest or capital to buy a distressed New York City hotel in this economic climate.

Several sources said companies that have done deals lately, including RLJ and Gehr Group, could be hungry for more. RLJ, the hotel investment group run by Black Entertainment Television founder Robert Johnson, reportedly closed in February on a Hilton Garden on West 35th Street for $125 million, another deal begun in 2008.

Apple REIT and HEI Hotels are also said to be potential buyers. New York’s Shining Moment is unfolding against a national spike of hotel sector distress, up 216 percent mainly due to the bankruptcy of Extended Stay, according to Real Capital Analytics.

Major firms are walking away from projects, as REIT Sunstone Hotel Investors did with the $96 million W San Diego in June instead of continuing to fund the mortgage, or looking to unload them, as Starwood reportedly is with its W Tuscany in Manhattan. Sources said it’s on the market at a fire-sale price of $200,000 to $250,000 a room — compared to the $500,000 to $600,000 per key luxury hotels had fetched two or three years ago. W declined to comment.
NYC Hotels Get Hammered