“An improving economy is not going to help,” Hoffman explained. The CMBS defaults is creating a Rube Goldbergian series of events to transpire for hotels. High end hotels are defaulting in much greater numbers than previous downturns, new construction will be halted indefinitely and numerous hotels are so deep in the hole that they are handing over the keys, closing shop and essentially boarding up the windows, admitting that there is no profit to be made for the next 10 years or so.

Contrary to public opinion, Hoffman noted, there really aren’t alternative uses for hotels. Senior housing or office space are close but no cigar. “There are too many bathrooms,” he explained. And with a closure, the value of the hotel will plummet roughly 80%.

This also causes problems with banks, which become skittish to lend into a sector which is already suffering terribly under the weight of its previous loans. This makes it hard to get money for building a new hotel or just as importantly, purchasing a struggling hotel.

Financing is loosening for existing properties as competition for the limited better products that come onto the market keep cap rates hovering around 8%, explained Keeling.

Every so often, “our Uncle (Sam) in Washington will sometimes ride to the rescue,” with a HUD loan for Motel 6 level property, said Keeling, but that is about the extent of the lending for hotels.

Keeling was a bit more optimistic, joking about Hoffman, “Have you ever met an optimistic policeman?” Despite the meager 0.4% increase in rooms in 2010, it bodes well for existing properties. He noted that transient leisure and transient corporate travel are up, business is still down, but they are modest indicators of positive movement. Keeling feels that 2010 will show a price transition remaining flat or slightly negative, but not continuing to plummet, while 2011 will push prices up about 3.5% and 2012 will be the official year of the comeback.

The stigma sent by the Federal government following the public outrage over the AIG junket to the St. Regis Hotel put the kibosh on the word “luxury,” causing a precipitous drop in high-end hotel revenue, which was already suffering under the weight of the condo market collapse. Many of the luxury brands were depending on those condos to stay viable, Keeling explained, and without them, those higher end shingles began to fold.

Voss said that in marketing the Grand Del Mar, his company consciously removed the words “luxury” and “resort” from its marketing and repositioned the campaign to revolve around consumers “[going] their own way.” The Grand Del Mar has fared well, as there is not a high luxury market in San Diego, however Keeling does not believe that there will be any luxury hotel development in the US again for the next 20 years, characterizing it as “heroic” if it took place. For the time being, four star hotels are getting “five star refugees,” Keeling explained.

In terms of the distressed hotels on the market, they will eventually be purchased by an opportunistic investor, similar to what Barry Sternlicht did during the last cycle, Hoffman notes. But right now, no one is investing, not even Starwood. “If Starwood doesn’t think it’s a good idea to invest in hotels, it’s a pretty good indicator” of how bad the sector is, said Hoffman.

“I don’t think a lo tof people in the industry want to look behind the curtain,” Hoffman intoned. “If you’re giving away rooms at half-price, your vacancy rate looks great. But you RevPAR is in the tank.”