Real Estate Forum - January 2008

try that we’ve heard of.”

For certain, the statistics bear out that assertion, although not to that stark of a degree. Lodging Econometrics, which tracks hotel construction throughout the US, counted 192 hotels with a total of 59,766 rooms either open or under construction as of the second quarter of 2007 that had all or some of their units available for sale as condominiums. For the second half of 2007, it was forecasting 41 condo hotels with 7,655 keys open or under construction. This year, that number should bump up a bit to 52 projects and 14,023 rooms; in 2009, the estimated figure is 58 with 13,890 keys.

That comes as no surprise to industry insiders, who agree that when 2007 came to a close, lenders were sitting on the sidelines, unwilling to fund any transaction, be it a new build, acquisition or refinancing. “The financing market is a fraction of what it was. People are just holding back, waiting for the New Year to come,” says Laurence Geller, chairman and CEO of Strategic Hotel Capital LLC in Chicago.

He divides the market into two categories: smaller deals worth less than $100 million and those in excess of that amount. “The deals that I’ve mostly seen done are sub-$100 million. Those seem to be running at a lower loan to value, probably in the 65% to 70% range, and are more expensive than previously, probably 275 to 325 basis points over Libor.

“For the bigger deals, it’s the non-traditional, non-Wall Street lenders—the insurance companies and the like—and their pricing seems to be more rational, flexible and predictable. But, again, I’m not seeing a lot of it,” Geller continues. “Generally, people have a case of sticker shock. They go from price A to price B in five minutes. I suspect that next year, there will be a little bit less of that and more deals will get done. People need to refinance,

Hotel borrowing should always be this easy.

but those who don’t have to aren’t doing it. Those that are, are doing it with more equity.”

Another reason for the diminished pipeline is the absence of cheap mortgage debt, which fueled a frenzy by speculators—not the end users—to buy and quickly flip units. That group of buyers has pretty much exited the stage. Consequently, developers can no longer depend on an army of mortgaged-up, would-be buyers to snap up an ever-expanding number of condo units, thus giving them a steady stream of dollars to pay off their debt costs. Those projects less dependent on speculative buyers, however, will fare better, note the experts.

“There has been an excess in the past seven years with an explosion of condo hotels, and you can’t treat them all equally,” says Jim Butler, chairman of the global hospitality group at Jeffers, Mangels, Butler & Marmaro LLP in Los Angeles. “I think South Florida is the poster child of excess. There were bad projects, mid-market projects, where probably 80% of the buyers were speculators, flipping these units, sometimes two to three times before the property even opened. You simply can’t compare that to a Ritz-Carlton- or Four Seasons-branded unit that’s being sold for $1 million to somebody who wants to have a home in Aspen or the Caribbean or Mexico. In the heady excessive days, everything went, or at least a lot of things went, and that fed the speculative frenzy. Clearly, that is gone. The speculators have run from this market, so now you’ve got 20% of the number of buyers you had before, which changes the dynamics.”

As Butler observes, not all projects are created equal. Indeed, the phrase “condo hotel” has many definitions. It could mean a project that sells units to individual buyers who then have limited use of the room. When the owner is not occupying the unit, the