Hotel owners, like home owners, behind on payments

MIAMI -- Like many home owners, hotels are starting to drown in debt.

They have been enticing travelers all year with sweet deals: credits for in-house spas and restaurants, up to 50 percent off five-star rooms, even free nights.

But all that discounting hasn't stopped occupancy from dropping an average of 10 percent. The result? Hotel loans have begun falling into delinquency faster than any other kind of commercial real estate debt.

The rising defaults paint a grim picture for an industry with increasingly more rooms than guests, and more hotels still opening every day. It's a problem that could get worse before it gets better, with demand expected to remain weak and ambitious new projects planned before the meltdown worsening the room glut.

The oversupply means room rates should stay low for at least another year, good news for consumers but not so great for hotel owners and the banks that lent them the cash to build or buy.

The rise in delinquencies is sharp. Five times more hotel loans are behind on payments this year than in 2008, according to mortgage data firm Trepp LLC, which tracks those traded by investors. In October, 8.7 percent were distressed, compared with 1.5 percent last year.

That's almost double the 4.8 percent rate for commercial property and the 4.5 percent rate for stores.

"Right now is an absolutely horrible time to be in the hotel business," said Ben Thypin, senior market analyst for market research firm Real Capital Analytics.

What happens when a hotel loan goes bad? Banks are much less willing to seize them than houses because running a hotel requires know-how. But some hotel owners are just handing back the keys where property values have plummeted.

In most cases, it is investment funds falling behind on payments, not major hotel companies. They generally don't own much property, instead franchising brands and earning a percentage of sales.

Most of the 1,231 U.S. hotels and casinos with troubled financing are remaining open. So, in the short term at least, consumers can expect to see deals on room rates for at least another year. Executives at STR Global, the hotel research firm, expect demand to rise 1.6 percent in 2010, but average rates to drop 3.4 percent.

Not in the 20 years the firm has collected hotel data has supply and demand been so far apart -- not even in the early 1990s recession or after Sept. 11, 2001.

In July, even the posh California resort where American International Group employees vacationed after the company got bailout funds -- inciting a wave of populist rancor -- was taken over by a lender. Franchisor Starwood Hotels & Resorts Worldwide Inc. is still operating the St. Regis Monarch Beach, but such upscale resorts are still struggling without Wall Street business.

Extended Stay Hotels LLC filed for Chapter 11 bankruptcy protection in June, with $7.6 billion in debt across 681 residence hotels that also depend on business travelers. And Red Roof Inn Inc. defaulted in June on $361.4 million in loans on 131 properties.

Most of the distressed debt is on new or newly renovated high-end resorts built from 2005 to 2007 on dreams of corporate meetings and cocktail hours. Luxury projects approved before the recession are still opening this year and in 2010 -- including three Ritz-Carltons.

And even more new hotels are on the way. Because outside investors have to secure the loans and take the biggest risk, hotel chains intend to keep growing -- even at the high end.

Starwood is adding 45 luxury and upscale hotels to its U.S. portfolio this year, and about 23 in 2010. InterContinental Hotels and Resorts is signing a contract every day to add to its more than 4,300 properties, the world's largest by room count, said Jim Abrahamson, the British company's leader in the Americas. This year, 335 of the company's new hotels are in the U.S.

Starwood CEO Frits van Paasschen brushes off critics, saying "rumors of luxury's demise are greatly exaggerated."

"As you look back on the excesses of the 1980s, 'The Bonfire of the Vanities,' the run-up in prosperity around the Internet boom -- even going to Pompeii and seeing the way people were being pampered 2,000 years ago," he said. "I think luxury, taking care of yourself, taking care of your family and those around you is so fundamental to the human experience."