Occupancy Falls, Values Skid

THE hotel receptionist may be twiddling his thumbs for want of customers, but for the gray suits who buy and sell hotel real estate, business is brisk.

A near-record number of hotels were sold in the United States last year, according to the Hotel & Motel Brokers of America (HMBA) - many at rock-bottom prices.

"Properties are selling for 40, 50, 60 percent of what they were three years ago," says Jeffrey Wilder of the Wilder Group in New York. He snapped up three deals himself this year.

His latest purchase: a 175-room hotel in Rockville, MD., groaning under $8 million in debt. "I bought it for $2 million," he says with a hint of bargain-hunter zeal. After a $1.5-million infusion to fix the place up, he expects that "within 24 months we'll be making close to 30 percent on our money."

It's a buyer's market.

Since 1988 the value per hotel room has declined almost one third, according to Coopers & Lybrand. Prices will continue to slide for the next couple of years, albeit at a slower pace, says Bjorn Hanson, head of the accounting firm's hospitality industry consulting group.

Most sources of capital, however, have long since dried up. "If a prospective buyer goes to his local bank these days and says, `I want to buy a hotel,' he doesn't even get the second sentence out before he's asked to leave," Dr. Hanson says, only half jokingly.

Lenders have cause for their caution. In 1991, the industry lost an estimated $5.2 billion, or $1,631 for every hotel room available. This year Coopers & Lybrand forecasts $5 billion in losses.

Like the collapsed saving and loan industry, hotels were a victim of the same 1980s boom-bust cycle. The supply of new hotel rooms started to accelerate in the early '80s, aided by a rise in available capital and a loosening of lending standards. Developers built hotels at a rate that eventually outpaced demand.

By 1991, hotel occupancy was only 60.8 percent, the lowest in decades. Yet last year another 440 new hotels opened with more than 75,000 rooms. As an Arthur Andersen report put it: "Perhaps misery loves company."

The combination of recession, oversupply, and overfinancing flattened the industry. More than two thirds of full-service hotels operate at a loss, while 54 percent of budget hotels are running in the red.

Even the big chains are struggling. Last week the Marriott Corp. announced restructuring plans in a bid to keep the losses on its debt-laden company-owned hotels from cramping its more promising hotel management operations.

Crushing debt has pushed most hotels to the edge. Many properties ended up being valued less than their mortgages.

Many of the hotels for sale today are being financed by the banks or financial institutions that have taken them over, the HMBA reports. As of June the Resolution Trust Corporation, the federal agency bailing out thrifts, had 74 properties in its portfolio - 40 under agreement of sale - down from a total of 109 in January.

Nor is the foreclosure pipeline drying up. There may be a greater number of "in-substance foreclosures" - hotels defaulting on debt but not yet in lenders' hands - than properties already foreclosed upon.

But banks and lenders have not closed the door entirely. Hanson estimates that "for every $1 of foreclosure we are seeing about $2.50-worth of restructuring debt."

IF a property has long-term potential, banks are finding ways to live with the current owners, even if they fail to meet debt service, he says. The incentive, of course, is the dearth of buyers.

Though the next 12 to 18 months will be the best time to buy hotels, HMBA says, the pool of prospectors is small: a few international buyers, some self-financed hoteliers like Jonathan Tisch of Loews Corp., and real estate investment trusts.

In the meantime, the industry is cutting costs. Last year hotel payrolls fell by about $1.1 billion as entire layers of management were phased out. Another $350 million of savings came through reducing guest amenities, cutting telephone bills, and lowering management fees.

Leaner management, a drop-off in construction, and a gradual increase in occupancy have some industry insiders touting a recovery by the mid-1990s. For William Hoffman, president of Trigild, a San Diego property management firm, the worst is over. "We have almost hit bottom."