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With the worldwide crisis in the credit markets clearly on their minds, five hotel industry veterans address a wide array of topics
(Tuesday, 11 November 2008)
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By John Koys
With the worldwide crisis in the credit markets clearly on their minds, five hotel industry veterans addressed a wide array of topics Oct. 16 during a panel discussion at the International Hotel Conference in Rome, Italy.
Moderator Martin Schiffman, managing director, Carl Marks & Co. Real Estate Group, got right to the issue of the crisis that was on everyone’s mind in mid-October.
"What happened?" Schiffman asked panelists, who composed one of the many groups addressing hotel industry topics at the three-day conference produced by Lodging Unlimited Inc. It was the sixth year for the conference, chaired by Morris Lasky and wife Mary Lou Koys.
"I think in the broader economy, it’s pretty simple: there are too many bad loans out there," said Chris Broderick, director of Hotel Capital Advisors Inc., who advises the prince of Saudi Arabia on his hotel investments. "How did we get here? A lot of people said it was greed. I think at the end of the day it was just a lot of average people trying to do their job and earn a buck. If they were going to get paid more to get the next loan out, they would do that."
In the hotel industry, Broderick said, the problem has been "too much money chasing too few deals."
Peter Krause, chairman, Barrow Street Real Estate Fund L.P., also pointed to the availability of inexpensive money in the United States beginning many years ago, as the genesis of the current financial problem.
"If you have to say who would be the villain in what happened, I’d say it was the former head of the Federal Reserve, Alan Greenspan. He just had too much cheap, plentiful debt out there, and people gorged on it, from people buying houses who couldn’t afford them or taking out aggressive car loans who couldn’t make the payments or large banks getting over-leveraged."
Krause added that problem times create opportunities and said most businesses – including the hotels – are cyclical. "The home building business now is in the tank in the United States after making a lot of money. The hotel business is going to go into a downturn. In the downturn there are great buying opportunities."
Sumner Baye, president and partner of International Hotel Network, said the credit crisis began with the much-maligned motive.
"I believe one of the major words was ‘greed.’ People were looking to make a hell of a lot of money in a very short period of time and thought this was the opportunity," Baye said.
Baye pointed to the example of hotel chain Extended Stay America, which investors bought for $8 billion. The owner eventually defaulted on the debt. "People just over-paid," Schiffman said. There was a lot of debt available, a lot of cheap debt available."
Panelist Rudolf Muenster, chairman, RWM Hotel Consult/Rudolf W. Muenster GmbH, noted that in Europe banks are much less willing than in the U.S. to lend money without adequate collateral.
"In Europe, mainly, equity is an important feature," Muenster said. He said in Germany, banks will simply not loan money if a borrower does not have enough equity in the deal. "When times are rough, you need equity," he said.
Panelists responded to what geographical markets will be most vulnerable in the coming economic slowdown.
"London has a problem," Muenster said. "All of the big spenders are not coming."
Peter Krause noted that areas where the local economy is most under stress is where the hotels will be most affected.
"Where the local industry is in trouble," Krause answered, citing the automobile industry in the U.S. "The last thing you want to do is buy a home or a hotel in Michigan." He said that state, home to Detroit, has the highest unemployment rate among the 50 states. He said if there are major lay-offs in the financial services industry, it will have an affect on the hotel industry as well as New York City restaurants and office buildings.
Chris Broderick said with a recessionary economy, leisure travel has slowed, and hotels that depend on pleasure travel market will be hurt.
"Any market that has been predominantly leisure-oriented, in particular that’s been exposed to North America, has dropped off the cliff," Chris Broderick said. He said locations that see a lot of business travelers have held up far better.
"I believe any market, whether it’s a city or a competitive set of hotels or a brand, is going to succeed in this trough that we’re going into if it has invested in its assets and can get the message out that they’re a better product than the next guy," Chris Broderick said.
Peter Krause said he thought the economic downturn will continue for the fourth quarter of 2008 and through most of 2009. He said that business will continue during the slump, and called for the real estate development industry to heed the lessons from the current crisis.
"Credit is the oil of the economy," he said. "If you can’t get a car loan or a home loan or a small business loan, nothing happens.
"It’s hard to find deals right now. There are deals happening, but the sellers have to be realistic. They don’t have the values they had last year. It’s a lot more challenging.
"If a developer can get a loan, they’ll throw up a building. Developers are like drunken sailors. You give them money, they’ll go spend it. We have to have lender due diligence, lender tough underwriting forbearance including a good slug of equity to make a deal work," Peter Krause said.
{John Koys is a free-lance writer with more than 20 years experience who lives near Chicago.}
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