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Two older airport hotels located near O’Hare Airport in Chicago are closing down at the end of the month. Previously, I wrote about trouble in the Las Vegas market as well trouble with some higher profile trophy properties. We’ll likely see additional closures after New Year’s. Similar to struggling retailers that keep their doors open for Christmas, many hotels give it one last try before the slow months of January and February arrive (although, in certain markets such as Florida January and February might be strong months).
The 467-room Wyndham O’Hare is shutting down, the latest sign of trouble in a brutal Rosemont hotel market that has been squeezed by a surge in supply and a dramatic drop in demand.
Though hotels are suffering everywhere due to a drop in business and leisure travel, the O’Hare market has been hit especially hard.
Revenue per available room (RevPAR) at hotels near O’Hare International Airport fell 35.7% in the first six months of the year compared with the year-earlier period, the third biggest drop among all 617 U.S. hotel submarkets, according to a report in the October issue of Lodging Magazine.
Source: Chicago Business
The only worse submarkets were the Las Vegas strip, with a 36.4% decline, and North Las Vegas, with a 36.5% drop, according to the report by Jan Freitag, vice-president of global research at Smith Travel Research, a Tennessee-based research firm. RevPAR, which accounts for occupancy and room rate, is a key measure of a hotel’s performance.
Similar to Las Vegas, where older hotels such as Riviera, Sahara and Hooters struggle in part due to new hotels pressuring price (added supply), the O’Hare market has also had the deadly combination of lower demand and increased supply.
Compounding the drop in demand is a jump in the supply of hotel rooms near O’Hare. A 251-room Aloft hotel opened near the airport in July 2008, and the 556-room InterContinental Chicago O’Hare opened about two months later.
The article states that the Wyndham was purchased for $25 million in 2003. On its face, it doesn’t seem that this was a loan of excess. Assuming there is no subordinate debt on the property (a second loan), it seems likely that the loan by San Diego National Bank was a reasonable loan on a valuation basis. The loan is likely interest only meaning the original loan was at about 66-67% loan-to-value. The Wyndham was purchased in 2003 meaning that this was not a 2005-2006 purchase at the top of the market.
So what is the problem? Like many borrowers, cash flows have declined and therefore the value of the property has declined. Additionally, while 70% loan to value loans were available in 2003 (with often generous appraisals), I would bet that Kennedy Associates would have trouble obtaining a 50% loan for this property today.
This appears to be a classic case of the “roll over” problem since the article states that the loan matured in October. The roll over problem is when a note matures and there is no new lender to step in and refinance the property. A mixture of declining valuations and tighter lending standards means that borrowers must often come up with a substantial amount of cash in order to get a project refinanced.
Let’s assume for the sake of discussion that the property is worth $16.5 million (the amount of the loan and over a 30% haircut from the 2003 price). In order for the borrower to obtain a new loan, they’ll likely have to come up with $8-9 million in cash. For a property losing money in a weak market, injecting cash into a property doesn’t make sense. Meanwhile, the borrower is so far away from meeting the lender’s standards for a refinance that a workout between borrower and lender becomes impossible.
For those that read generally about commercial real estate being the next big bubble to burst, Wyndham O’Hare is textbook example of the problems out there. |
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发表于 2009-12-24 08:43 AM
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发表于 2009-12-25 05:54 PM
