ALIS 2012 spoiler alert
Don’t hold your breath on distressed deals
While we should see an influx of distressed deals over 2011, keep in mind the 30+ day CMBS delinquency rate for hotel loans fell 2.11% in 2011 to 12.2% in December while CMBS delinquency aggregately rose seven basis points to 9.58%. With the first wave of 2007 loans hitting balloon dates in first quarter 2011, CMBS delinquency may rise by up to 75 basis points. However, this increase will be strongly influenced by the continued falloff in industrial/office performance and less so by an improving lodging sector.
Of the 2,260 hotel loans totaling US$35.5 billion in 279 markets cited by Trepp, 11.9% are 60+ days delinquent. If even half of those come to market in 2012, we would see 135 properties totaling US$2.1 billion. Should total hotel transactions hold steady in 2012, REO deals would represent just 13% of total hotel transactions this year.
2012: The year of substantial brand PIPs
Deferred renovations over the last two years, coupled with the brands’ efforts to reinvent themselves through innovative public space and rooms packages, will likely set off strict PIPs in excess of US$15,000 per key for core select-service product and as high as US$30,000+ per key for core full-service. This will create a sort of catch-22 scenario. Many owners, especially those approaching or already past their anticipated hold periods, will be hard pressed to justify undertaking the PIP and more likely to take these assets to market. On the flip side, enormous PIPs have the propensity to crush seemingly good deals. The outcome: Those who understand brand standards and brand alternatives will come out ahead in 2012 from both an acquisition and disposition standpoint.
That prize legacy asset may finally be yours
We all have one in mind — the long-standing generational hotel that we have a fixation for that never seems to come to market, going as far as to call the owner on a semi-annual basis. Why could 2012 be the year? Long-term capital gains tax is set to increase from 15% to 20% at year-end 2012 along with the addition of a 3.8% Medicare tax. As many of these assets have been depreciated and paid down to nothing over the years, that 8.8% difference in taxation represents a sizable piece of the pie for owners. Act accordingly, and you may have yourself the hotel equivalent of a 1960 Aston Martin.