A decline in revenues is forcing hotels into foreclosure. The aggressive deals being used to lure guests onto a property is helping to bring in some revenue, but it may not be enough. Occupancy is down 10%, which has sent hotel mortgages into delinquency faster than the rest of the commercial real estate industry.
And it could get worse next year. An oversupply of guestrooms could keep room rates low, making 2010 a high-risk year for hotel foreclosures. Demand should gain 1.6%, according to hotel research firm STR Global, but average room rates are likely to fall 3.4%. The result would be the greatest spread between demand and rates in the 20 years STR Global has been collecting data.
Hotel mortgage delinquencies are up by a factor of five from 2008 to 2009, according to Trepp LLC, a mortgage data firm. Distressed hotel mortgages jumped from 1.5% of those outstanding in October 2008 to 8.7% in October 2009. General commercial property reached 4.8% last month, with stores at 4.5%.
Hotels and their franchisors are doing their best to hold on. Starwood Hotels & Resorts Worldwide (HOT) is keeping the St. Regis Monarch Beach running, despite the property's mortgage woes. But Extended Stay Hotels filed for Chapter 11 protection because of its $7.6 billion in debt, and Red Roof Inn defaulted on $361.4 million in loans on 131 properties.
Yet, this doesn't mean the world has stopped. Starwood is building 45 luxury properties in the U.S. this year, with another 23 coming in 2010. InterContinental Hotels and Resorts (IHG) is contracting daily to add hotels to its portfolio of 4,300. The 335 new properties it added this year have all been in the U.S.