Several analysts are predicting more defaults and foreclosures on high-end hotels and resorts throughout the rest of this year. While their opinions differ on the severity of the threat this poses to the industry, they agree that meeting planners could begin to see service impacts at some of their preferred properties and should take a hotel's financial health into consideration when negotiating a deal.
Several hotel foreclosures have made headlines in recent months, most notably the luxury St. Regis Monarch Beach resort, ground zero for what became known as the "AIG effect." Citigroup in July took control of the Dana Point, Calif., resort that hosted the sales retreat for the insurance giant shortly after its federal bailout, following several months of missed payments by its owners.
California hotels like the St. Regis are facing a particularly bleak situation right now, according to the 2009 Mid-Year California Hotel Sales Survey, published last month by Irvine, Calif.-based Atlas Hospitality Group. The state is now home to 250 troubled assets that either are in default or have been taken over by their lender, and that number could double by the end of the year, according to the report. These include the W Hotel San Diego, the Four Seasons San Francisco and the Marriott Hotel Downtown Los Angeles, the largest hotel in default in California, according to the report.
"Pretty much every full-service hotel that caters to the meetings business is in some stage of difficulty right now," Atlas Hospitality Group president Alan Reay said. "The forecast is that 2010 will be worse than 2009, so it's going to get a lot worse before it gets better."
The sluggish real estate market for hotels compounds the economic woes of the industry in California, with sales at a record low and the number of hotels on the market at a record high. There are about 19 hotels on the market for every one sold this year, the report said. "It's safe to say what's happening in California is happening in the rest of the country," Reay said.
Even as early as January, when hotel revenue projections for the year were less grave than they are now, Atlanta-based PKF Hospitality Research predicted that the number of full-service U.S. hotels unable to pay their debt would grow by one-quarter this year. Hotels that had been operating at occupancies below 70 percent are particularly vulnerable, according to PKF.
"Just about every resort in Hawaii is under water, so to speak," Reay said, "as are some major resorts in Florida and the Caribbean."
NYU Tisch Center associate professor Bjorn Hanson said it's important to keep the situation in perspective with other downturns, however. The U.S. lodging industry saw its worst level of mortgage delinquencies in its history in 1990, when 14.2 percent of mortgages were delinquent. In the downturn following the Sept. 11, 2001, terrorist attacks, mortgage delinquencies peaked at 5.25 percent. Currently, the rate is just under 2 percent, Hanson said.
"That still is a big number," Hanson said, "but if we use delinquencies as a measure, it's not as difficult of a situation for hotels in terms of mortgage payments as 2002 or 1990."
The biggest impact of the delinquencies planners are likely to see is service reductions. Luxury and upper upscale hoteliers have said they intend to maintain service levels as much as possible, but Hanson said some hotels might have to limit hours for their restaurants, fitness centers, business centers, concierge services and housekeeping. Hoteliers might even have to shutter entire wings or, in cases like Four Seasons' resort on Exuma in the Bahamas, shut down entirely, Reay said.
When seizures or bankruptcies do happen, however, meeting planners in some cases might not see any effect at the property. Franchise and management agreements usually survive bankruptcies and contain a level of brand standards that must be maintained regardless of who is holding control of the property, Hanson said.
Planners could "ask for a clause in contracts that the owner or operator has an obligation to notify the contracting party of negotiations related to Chapter 11,"Hanson said, but noted such clauses are difficult to negotiate.
In some cases, planners who negotiate far in advance could find themselves with an event at a property that has changed brand flags as part of financial fallout, Reay said. He pointed to the Four Seasons Aviara resort near San Diego, where owners in recent months have tried to bring in Dolce Hotels and Resorts as its management instead.
This situation will not happen in most cases, said Tom Botts, a partner with strategic advisory firm Hudson Crossing.
"The fundamentals aren't with the brand, they're with the financing," Botts said. "If suddenly JPMorgan owns a hotel, for example, just taking the Sheraton flag off and making all the hotel staff change their uniforms is not going to make a difference."
The St. Regis Monarch Beach, for example, will continue to operate as a St. Regis even under Citigroup's control, and Citigroup has said guests should see no impact. The time when brands are more likely to change, Reay said, is when the lenders sell the property to a buyer looking for ways to lower expenses.
Hanson said meeting planners should take comfort in the major capital investment most hoteliers were making in the lush years leading up to the economic downturn. Those investments will lessen the likelihood of noticeable impact, even at troubled hotels, as pre-planned events are conducted, he said.
"It wasn't just beds and flat-screen televisions," according to Hanson. "It was carpeting and lobby concepts, so they're better prepared for a period where there's less capital to be spent on upgrading hotels."
Originally published Aug. 10, 2009