Summer travel trends in 2009 saw the introduction of the “staycation,” where many jetsetters opted to retreat to a resort in their own hometown instead of breaking the bank at luxury hotels in metropolitan cities far, far away. The trickle-down effect has hit and now many of those luxury hotels are scrambling to save their own bottom line.
Just last week, Bloomberg reported that many luxury hotel owners are currently at risk of defaulting on their debts as the recession cuts occupancies dramatically. Realpoint LLC, a credit rating company that tracks commercial mortgage-backed securities, states that loans that have been secured by more than 1,500 hotels totaling $24.5 billion may be in danger of default. In addition, the credit crunch constrains refinancing and while “all segments are showing signs of distress,” it is clear that the “luxury segment carries much higher loan balances” and is more clearly affected, says Frank Innaurato, managing director of CMBS analytical services in Pennsylvania.
Foreclosure proceedings have begun for the Four Seasons San Francisco who currently has a $90 million loan secured that is 90 days delinquent. The 277-room, five-star property received the loan from Millennium Partners LLC, a prevailing real estate firm that controls 1,860 residential units, more than 2,000 hotel rooms and 1 million square feet of office space. When the Four Seasons San Francisco was contacted for comment, all emails and phone calls went unanswered.
Another location currently striving to make it through the recession is New York City’s Dream Hotel, a 220-room hotel on West 55th Street known for its 300-thread count Egyptian bed linens and iPods in the rooms. Now they are becoming known for their $100 million loan that is at risk of default, owed to Surrey Hotel Associates LLC who is currently trying to streamline the debt and defer payments, according to Riyaz Akhtar, vice president at Surrey. Despite their attempts, Akhtar’s outlook on the overall situation is less than encouraging, “What’s happening to us right now is happening, and will continue to happen, to many hotel properties given the current market,” she said.
The Westin Aruba Resort & Spa, managed by Starwood Hotels saw its occupancy rate drop from a 2008 average of 63 percent to 41 percent in May 2009, and was subsequently foreclosed on that same month. One of the problems the hotel recently faced was direct competition from a 450-room luxury resort that was built next door.
In a June 23 report, Morgan Stanley analysts predicted that the U.S. hotel loan delinquency rate may, in fact, climb to 8.2 percent by the end of this year. If their prediction is correct, it would match the peak delinquency rate from the 2001 recession. Morgan Stanley analyst, Andy Day, notes that high-end hotels are currently suffering from a “heightened focus on prudent corporate travel expenditures,” and a dramatic decrease in vacation travel.