Path: bloom-picayune.mit.edu!snorkelwacker.mit.edu!news.media.mit.edu!americast.com!usa-post Newsgroups: usa-today.bonus From: usa-post@AmeriCast.Com Organization: American Cybercasting Approved: usa-post@AmeriCast.com Subject: bonus Thu, Mar 5 1992 Date: Thu, 5 Mar 92 05:55:52 EST Message-ID: 03-05 0000 BONUS: Hope rebuilds for hotels USA TODAY Update March 5, 1992 Source: USA TODAY:Gannett National Information Network For Houston's Radisson Suites hotel, it has been a tough road back. Originally called the Luxeford Suites, the 190-suite hotel opened in 1985. In a market already glutted with new hotels, the Luxeford quickly sank in a sea of debt. The lender, a defunct savings and loan, foreclosed. By last year, the hotel - shabby, dirty and nearly empty - was in the hands of the Resolution Trust Corp., the federal agency cleaning up the S&L mess. It's an all-too typical story about the deeply depressed hotel industry. But the Radisson Suites is also a prime example of how the industry is painfully clawing its way back toward profitability. WHAT IS HAPPENING WITH HOUSTON'S RADISSON NOW? Now under new management and carrying a smaller debt load, the hotel is making money - barely. Its new owner, GENCOM Interests, has poured nearly $1 million into refurbishing the property. With construction at a standstill, Houston's hotel glut is easing. Local occupancy rates have risen more than 30% since the Luxeford opened. "We think 1993 will be the year we reach our full potential," says Karim Alibhai, vice president of GENCOM, a group of overseas investors that owns several Houston hotels. HOW DOES THE INDUSTRY LOOK AS A WHOLE? The industry as a whole is also on the mend, but it's too soon to turn off the vacancy signs. Of the USA's 27,000 hotels, two in three lost money last year, says Bjorn Hanson, an industry analyst for Coopers & Lybrand accounting firm. Hotel-property prices are 32% below their peak of the late 1980s, and some $1.3 billion in hotel mortgages - about 5% of balances outstanding - is in foreclosure. An additional 13% is in default. IS THE WORST OVER? "We're around the corner," says Jill Krutick, a financial analyst for Salomon Bros. National hotel-occupancy rates, though still low, are struggling back toward profitable levels. The average room price, now about $61 a day, has lost ground to inflation for almost three years. It's expected to rise slightly this year but show a solid after-inflation increase next year. WHAT HAS SPARKED HOPE? The wave of speculative building that created the glut has come to a crashing halt. Hanson predicts developers will start work on 18,000 new hotel rooms this year, compared with almost 160,000 in 1985, the peak of the boom. Existing rooms, meanwhile, are disappearing as older properties are demolished or converted to other uses. According to Hanson, nearly 20,000 rooms were taken off the market last year, and 15,000 more are expected to be pulled from the market this year. HAS THE HOTEL INDUSTRY GOTTEN SO LOW THAT IT CAN'T GET ANY LOWER? "In terms of supply and demand, we've hit bottom," says Sean Hennessey, a hotel-appraisal expert for Landauer Real Estate Counselors, a New York-based consulting firm. Recovery is likely to be too slow to save owners of some troubled hotels. Houston's turnaround, for example, didn't rescue the Houstonian Hotel, best known as the legal residence of President Bush, who rents a suite there a few nights every year. The hotel filed for Chapter 11 bankruptcy-court protection last month. HAVE JAPANESE INVESTORS BEEN AFFECTED? Japanese investors who bought so-called trophy properties in the USA at inflated prices also have been hit hard. One of the largest failures: Maruko, a subsidiary of a Japanese real-estate firm. Maruko - which owns several California hotels, including the Hollywood Roosevelt and the Hyatt Grand Champion in Indian Wells - filed for Chapter 11 bankruptcy-court protection last year. IS ANYONE IN THE HOTEL INDUSTRY IMMUNE TO THE DOWNTURN? The crash has rocked the industry, including many luxury hotels. But the middle of the market has suffered the most damage. Badly bruised: so-called full-service hotels, ones that offer room service, meeting facilities, restaurants and other amenities. Many operate under the familiar flag of Sheraton, Marriott or another major chain. Though managed by those firms, the hotels are usually owned by independent investors. They've been squeezed by the growth of budget alternatives such as Promus' Hampton Inn chain or Red Roof Inns. Unable to beat them, many full-service hotels have been forced to join them - changing brands to economy franchises. DOES SWITCHING FROM FULL SERVICE TO ECONOMY HELP? Switching to a budget brand means cutting room rates, and that has left many hotels unable to cover mortgage payments. Many owners borrowed heavily during the 1980s to finance expansion or convert equity in the properties into cash. Lenders were glad to oblige even though hotels are more vulnerable to downturns than most real estate. Unlike office space, which is leased for years at a stretch, hotel rooms have to be sold every night. "Hotels aren't real estate. They're businesses," says Doug Billings, a hotel specialist with the RTC. "That's a lesson a lot of people have learned the hard way." WHAT'S THE MAIN REASON FOR THE DOWNTURN? Debt service, even more than the new hotel glut, is the main reason the industry as a whole has lost money in each of the past 10 years, analysts say. The industry lost more than $5 billion last year, according to Coopers & Lybrand. Reducing loan interest and principal payments is the key to recovery. WHAT'S HAPPENING NOW AS A RESULT? The recapitalization process already is under way as mortgages are foreclosed or restructured. Lenders are moving foreclosed properties back onto the market at discount prices. Leading the way: the RTC, which owns more than 100 hotels inherited from failed thrifts. The agency is pushing to unload those properties and has sold 45 hotels the past four months. It's a painful process but a necessary one. Lower prices give new-hotel owners a better shot at turning around money-losing properties. WHAT ARE THE HOTELS SELLING FOR? Most RTC hotels are selling for 80% to 85% of their current appraised value, according to Billings. But even at those prices, some experts say, hotels are a good bet for investors with deep pockets. "If people can hold on, the hotel industry is probably going to be the place to be in a few years," says Dan Daniele, a hotel-industry consultant with the Ernst & Young accounting firm. WHAT'S THE OUTLOOK FOR THE INDUSTRY? For now, though, recovery is fragile. The industry isn't likely to turn a profit until 1994. Hotel values aren't expected to start improving until 1997, according to a survey of real-estate experts conducted last year by Real Estate Research. But the wait should be worth it, says Steve Rushmore, president of Hotel Valuation Services, an industry-consulting firm: "I see only an upside from here on." Bonus Editor: Michele Coleman. (1-919-855-3491) Making copies of USA TODAY Update (Copyright, 1992) for further distribution violates federal law. This article is copyright 1992 Gannett News Service. Redistribution to other sites is not permitted except by arrangement with American Cybercasting Corporation. For more information, send-email to usa@AmeriCast.COM