Reay says prices will drop by 10% to 20% this year after falling 30% last year. "We expect to see 150 to 175 transactions," the Atlas president says, up from 92 transactions in 2009, which was the lowest number of transactions in the more than 15 years that Atlas has been tracking the state's hotel sales. The 92 sales in 2009 compared with 187 transactions in 2008.
Distress is the chief factor driving the market right now, and Reay says that where the sales figures go this year will depend to a large extent on what happens to the distressed properties. Thus far, conventional lenders have been extending loans rather than foreclosing, and special servicers of CMBS loans have been even more reluctant to foreclose.
"The lenders are delaying and working out forbearance agreements, so the jury is still out on whether those properties are going to get extended and extended and will never come to market, or if one lender will start the foreclosure process and sell some assets, which would tend to make other lenders follow suit," Reay says. He doubts that lenders can continue to extend loans indefinitely because some of the hotel owners are going to throw in the towel and hand back the keys to lenders, forcing their hand.
When the hotel operators give back properties to the lender, "The banks will find that hotels are expensive to run," and since banks don't know how to run hotels, they will sell them, Reay says. What the special servicers will do "is an entirely different question," Reay adds, because they have financial problems of their own. He notes that Capmark has already filed for bankruptcy, and even with Warren Buffet having taken it over, it's not foreclosing on hotels.
Hotel sales in California were so anemic in 2009 that a single $90 million sale, the 404-room W in San Francisco, was the largest hotel sale in the state during the year―a situation that surely would not have been the case when the market was hot. The San Francisco W sale alone accounted for over 17% of the entire California dollar volume for 2009.
The 51% plunge in the number of sales in 2009 actually fell more than the decline of 10% to 20% that Atlas had predicted. "We did not anticipate that lenders would deny and delay as much as they did on their troubled hotel loans," Reay says.
Atlas expects lender sales this year to account for over 50% of transactions, and Reay says that conditions almost guarantee that sales prices will decline. Even if the industry's declining RevPAR flattens out, which would be an improvement, "The sheer volume of distressed deals that are ready to hit the market will create a supply-and-demand situation that will drive prices down," Reay says.
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