NEW YORK - The recession-ravaged U.S. lodging industry will offer opportunities next year for would-be hotel investors interested in picking up plum properties suffering from falling revenue and high debt.
As much as $3.5 billion worth of hotels are expected to trade hands in the United States next year, compared with just $2 billion in 2009, according to projections from hotel investment firm Jones Lang LaSalle Hotels.
Much of this activity will be spurred by the sale of distressed hotels struggling to fund looming debt payments as travel demand remains weak.
When these loans come due, I think that's when you're going to see an awful lot of product in the market, said Daniel Lesser, a senior managing director of CB Richard Ellis.
Nearly 1,300 properties in the United States are classified as distressed, representing a value of more than $32 billion, according to Real Capital Analytics. That figure ticks up daily as more and more hotels buckle under the economic downturn, which has sapped travel demand.
At some point, it's simple math, said Dan Fasulo, head of research at Real Capital. If your income from the property (is cut) by half, there's not enough money to go around to pay the bank, to pay your staff, to pay your suppliers.
Hotel deals in the United States have been few and far between in 2009 as buyers and sellers haggled over the worth of these properties.
There's been a huge disconnect between bid and ask, Lesser noted, adding that valuations are now not as far apart as they were 18 months ago. Many take this as a sign that transactions will pick up again in 2010.
MORE PERISHABLE THAN FRUIT
The daily resetting of room rates means hotels are highly sensitive to fluctuations in the economy.
Daniel Vosotas, chief executive of Trans Inn Management, said his company had to revamp its hotels' budgets at least four times this year to cope with volatile economic conditions.
We lease every 24 hours, Vosotas said. Our product is more perishable than fruit.
This sensitivity, coupled with looming debt maturities coming due over the next three years, may bode badly for hotels scrambling to meet payments, but could spell opportunity for funds looking to buy.
In 2010, there will be a pick-up in transactions, not just in hotels, but in commercial real estate in general, said David Weymer, a managing principal at Noble Investment Group.
Noble has about $200 million available in a fund dedicated to buying hotels. Weymer said the Atlanta-based firm has not closed on an acquisition in about 20 months, but he expects it will buy a property fairly soon.
It's like being at the junior high dance waiting to see who goes on the dance floor first, Weymer said. In 2010, they're going to start to see more couples get on the dance floor.
BILLIONS ON THE SIDELINES
This week, Stifel Nicolaus analyst Rod Petrik wrote that more than $38 billion in opportunity funds stand at the sidelines looking to buy distressed assets. Of that sum, $7.5 billion could be earmarked for buying hotels, he wrote.
Host Hotels & Resorts Inc (HST.N) said in October it was looking to buy hotels that might fit into its stable of top-tier properties. Pebblebrook Hotel Trust (PEB.N) raised about $350 million in an initial public offering this month to acquire distressed hotels.
But other funds are struggling to raise the cash to fund hotel acquisitions, suggesting there are mixed feelings about the pace and number of choice properties that could come up for sale in 2010.
Last week, another company vying to go public, Chesapeake Lodging Trust Corp, had to postpone its initial public offering indefinitely.
A lot of people are little bit hesitant to commit into a fund without knowing how long it's going to take before you start acquiring assets, said Paul Novak, president of Bedrock Partners.
Novak is trying to put together an fund of $200 million to $250 million to buy hotels. He projects there will be some pick-up in hotel sales by spring.
I think as soon as there's a clear bottoming and operating performance starts to pick up, I think you'll see transactions starting to become much more apparent, he added.
(Reporting by Deepa Seetharaman; editing by Andre Grenon)