Dallas area has a flood of hotel foreclosure filings

A perfect storm of overbuilding and a depressed economy is threatening a growing number of Dallas-Fort Worth hotels with foreclosure.In the first four months of 2010, more hotel foreclosure filings have been recorded in North Texas than in all of last year.




And the industry outlook is for defaults to increase.



"The hotel market here got overbuilt and overfinanced," said George Roddy, whose Foreclosure Listing Service track property foreclosure filings in more than two dozen Texas counties. "There are just too many of them."



So far this year, Foreclosure Listing Service has recorded 43 hotel and motel foreclosure filings in the four-county area. That's up from 41 for all of 2009 and just 18 in 2008.



Hotels posted for forced sales by lenders range from the luxury Four Seasons Hotel & Resort in Las Colinas, with $183 million in original debt, to decrepit highway motels with less than $1 million in debt.



"What surprises us was that most of these foreclosure filings didn't occur in 2009," said Randy McCaslin with hotel analyst PKF Consulting.



Lenders may have been waiting to see how the economy was going to play out, McCaslin said.



"It seem like now is the time" lenders have decided to make their move, he said. "It's happening to any real estate that's overleveraged. It was the exceptional hotel that could make debt service last year."





Worst since 1930s



Income from hotel properties has taken a big hit.



From late 2006 to late 2009, D-FW hotel occupancies fell 8.3 percentage points to 45.5 percent, according to the latest data from PKF Consulting.



Over the same three years, average hotel room rates fell 6.9 percent. Rates are down an even greater 12 percent from the peak in 2007.



PKF Consulting says that the U.S. hotel business in 2009 had the worst year since the 1930s.



And the industry now has the highest proportion of troubled properties of any real estate type, according to a recent report by Real Estate Research Corp. An estimated $38 billion in U.S. hotels are now considered distressed.



"The luxury hotels are getting hit the hardest because of the AIG effect," said longtime Texas hotel industry expert John Keeling of Houston's Valencia Group, a hotel investor and developer. "Many business travelers are avoiding the luxury hotels because they don't want to be criticized for spending too much."





Running out



Keeling anticipates that 2010 will be another tough year for Texas hotels and that 2011 won't be much better with only the "beginnings" of room rate and occupancy recovery.



"Will we get there by 2012? That's probably even optimistic," he said.



Keeling said many of the state's hotel operators have "held on by their fingernails" and are now running out of options to meet mortgage obligations.



So far, the lenders have been reluctant to take the properties back, "because they didn't know what to do with them," Keeling said.



In 2009, just $2.5 billion in U.S. hotel properties were sold to investors, according to Real Estate Research – a 77 percent decline in sales volume from 2008. The peak year was in 2007 when $78.5 billion in hotel property sales were recorded.



Hotel brokers say there are buyers for distressed hotels, but so far few good properties have come to the market.



"What we are seeing on the market now is a good bit of junk that needs a lot of renovation," said David Young, a hospitality property broker with Henry S. Miller Commercial. "I've got a bunch of clients that want to buy hotels."

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