Woes Compounded by War, Area Hotels Teeter on Brink

Staff Reporter

The war with Iraq, whatever its duration, may have dealt a deathblow to several area hotels already reeling from the economic downturn and post-9/11 travel decline.

General managers report that the build up to war had chilled bookings over the last 60 days, all but erasing the nominal gains area hotels had started to make at the end of 2002.

Continued weak occupancy and declining room rates could push some operators to default on loans, file for bankruptcy protection or sell their properties.

The pre-war chill came as L.A. County hotels averaged 57.2 percent occupancy in December, the most recent data available. That represented an 11 percent increase over the 51.5 percent occupancy reported in the year-earlier period, according to consulting firm PKF Consulting.

Downtown hotels have been the biggest drag on the market, with occupancy at hotels, where the average room rate was more than $85 falling, to 35.1 percent in December.

Some group cancellations due to the war may be rescheduled, but it may be too late for some.

General managers said they have few places left to cut. Since 9/11, many hotels have been running on near-skeleton crews and lean levels of supplies. Staffing would likely lead the next round of cuts.

"My employees, I'm very worried about them," said Paul Hortobagyi, general manager of the 84-room Georgian Hotel in Santa Monica. "Housekeepers, janitors, they are going to get hit right away because I won't be able to afford to keep them any more."

Hortobagyi expected at least a 20 percent to 30 percent drop-off in reservations with the start of war. Business travel will slow to a trickle and tourists, especially those from European countries that oppose military action against Iraq, might decide to vacation on sunny beaches in Spain or Italy instead of traveling to the United States, he said.

Compounding the problem: high gasoline prices that are keeping away tourists from within driving distance the same group that stemmed the industry shortfall after the 2001 terrorist attacks.

"I feel like I am lying on the ground and everybody is kicking away," Hortobagyi said.

Downtown, the Omni Hotel has seen soft occupancy levels since February and April's numbers are looking weak, said Jim Snow, its general manager.

"It's going to get worse before the end of the year," Snow said. "We have some pretty tough months ahead of us."

There are signs that the shakeout is already underway.

In just the last several days, there has been at least a 20 percent spike in the number of hotels for sale in Los Angeles County, where 26 properties with 50 rooms or more have been put on the market, according to Alan Raey, president of Costa Mesa-based Atlas Hospitality Group.

It's a level unseen since the aftermath of the 1991 Gulf War, according to some brokers. "We've been seeing more activity in the past two weeks than we've seen in the past 10 years," said Raey.

More properties could hit the block in the next year, according to several brokers.

"Most (sellers) believe there will be a lot of product coming to market in the next couple months," said Art Buser, managing director with Jones Lang LaSalle. "So they are trying to beat the rush."

The 727-room Sheraton Gateway Hotel near Los Angeles International Airport changed hands in December for $42 million. And as part of its divestiture of assets, Vivendi-Universal is shopping its Sheraton Universal Hotel, asking around $45 million for the 442-room hotel, according to a source with knowledge of the situation.

Steve McKenzie, a managing director with Eastdil Reality representing Vivendi, declined comment.

Helping the churn are investors who have left the volatile stock market and are investing in real estate as well as hotel owners who are lowering asking prices by 10 percent to 20 percent because of lower occupancy levels and room rates during the past two years.

Not all impending sales will be voluntary.

Many local properties aren't meeting their debt service agreements, according to Buser, who is bringing 18 hotels to market in the next month, the busiest he's been in 10 years.

"The banks and lenders have been patient for the last couple years," he said. "The question now is will they continue to be for another year?"

James R. Butler, a partner at Jeffer Mangels Butler & Marmaro LLP who specializes in hospitality real estate finance, said he is starting to see "big name, big city" hotels in trouble. "It is no longer going to be the no-name hotel in a tertiary market going under anymore," he said.

Lenders are pressuring owners of those properties. "There has been a very significant change in the last 30 days," he said. "We have seen a significant uptick in talk of lenders taking hotels into receivership and hotels filing bankruptcy."

Butler said many hotels could be in jeopardy because in the past five years, 40 percent of the loans taken out by hotels have not been from banks, but from Wall Street investors. Instead of working with the hotel when it can't make its debt payments, issuers of these securitized loans typically take possession of the property.

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