There will be a "huge increase'" in U.S. hotel foreclosures next year as debts come due and little financing is available, said Robert Sonnenblick, a hotel developer.
The wave of commercial mortgage-backed securities needing replacement debt "is going to be a close-to-catastrophic problem," Sonnenblick, chairman of Sonnenblick Development LLC, said today at the Bloomberg Commercial Real Estate Summit in New York. "The end result of all of this is you're going to see a huge increase of hotel foreclosures."
About $21.7 billion in commercial mortgage-backed securities on 232 hotels are coming due in the next 12 months and need to be refinanced, according to Realpoint, a securities ratings firm now owned by Morningstar Inc. At best, a third of that will be refinanced, with many properties being taken over by lenders, Sonnenblick said.
Hotels were among the first real estate categories to recover following the 2008 Lehman Brothers Holdings Inc. bankruptcy as business travel and tourism rebounded. Lending to U.S. hotels increased fivefold in the third quarter from a year earlier, the biggest gain of any real estate asset class, the Mortgage Bankers Association reported Nov. 3.
High-end hotels in major U.S. cities such as New York, Boston and San Francisco have fared best during the recovery. The occupancy rate was 71 percent for the highest-priced segment of the hotel market this year through September, compared with 62 percent for all U.S. hotels, according to Smith Travel Research Inc. in Hendersonville, Tennessee.
While bookings are up, financing remains the biggest impediment to hotel sales and construction, said Jason Pomeranc, co-owner of Thompson Hotels, an owner-operator of boutique lodging properties in cities including New York, Los Angeles, Miami Beach, Florida.
"Traditional lending is still extremely difficult," he said. "Buyers want to buy. Sellers will need to sell. Someone is going to have to blink at a certain point."
The potential for foreclosed hotels to hit the market is discouraging lenders from financing new construction, said Ian Schrager, chairman of Ian Schrager Co. and a pioneer of the boutique hotel concept.
"It's very difficult to build when everybody's anticipating there's going to be a flood of existing assets at opportunity costs to buy," said Schrager, who estimates he can build new hotels in New York City for as little as $400,000 per room.
Developers plan about 50 hotels in New York through 2013, more than triple the number in Washington, the next-busiest U.S. city for construction, according to hotel-consulting firm Lodging Econometrics.