Hotel loan defaults could double in the United States, reaching 30 percent, by 2012 as the lodging industry struggles with a drop in cash flows and lower property values, Fitch Ratings said on Thursday. Hotel revenues have fallen nearly 20 percent since 2008 and cash flows are not expected to increase until 2011, Fitch said in a research note.
"Hotel property values are off as much as 50 percent from 2007 peaks, but borrowers by and large have been able to keep their loans current because of historically low Libor rates," said Senior Director Jeffrey Watzke in the note. Currently, 16.6 percent of hotel loans backed by commercial mortgage-backed securities are delinquent. That figure could jump to between 25 percent and 30 percent by 2012, Fitch said.
Forty-five percent of the $42 billion Fitch-rated hotel loans originated in 2006 and 2007 were based on a floating interest rate. Of these loans, nearly 80 percent mature in 2011 and 2012, when defaults are expected to the most "pronounced," Fitch said.
"Many of these loans will have difficulty refinancing given their lower values and operating cash flows and higher debt yields required by the lenders," Watzke said. But Watzke pointed out one bright spot that could prop up hotels' performance: the slowdown in the number of new rooms expected to flood the market.
"The prospect for recovery is aided by a deteriorating supply pipeline which should allow the industry to better absorb new supply and regain pricing power as demand returns following the economic recovery,' Watzke said. "Project cancellations and declining new project announcements stem from both deteriorating market performance and the lack of available construction financing," he added."