Hotel Owners, Like Home Owners, Behind on Payments

Like many home owners, hotels are starting to drown in debt.

FILE - This Oct. 9, 2008 file photo shows a pool at the St. Regis Monarch Beach Resort in Dana...

FILE - This Oct. 9, 2008 file photo shows a pool at the St. Regis Monarch Beach Resort in Dana Point, Calif. The resort, where American International Group employees vacationed after the company got federal bailout funds, is among more than 1200 US hotels with troubled financing as of October, five times as many as a year earlier as hotel delinquency and default rates passed those in any other commercial real estate sector. (AP Photo/Chris Carlson, File)

(AP)

They have been enticing travelers all year with sweet deals: credits for in-house spas and restaurants, up to 50 percent off five-star rooms, even free nights.

But all that discounting hasn't stopped occupancy from dropping an average of 10 percent. The result? Hotel loans have begun falling into delinquency faster than any other kind of commercial real estate debt.

The rising defaults paint a grim picture for an industry with increasingly more rooms than guests, and more hotels still opening every day. It's a problem that could get worse before it gets better, with demand expected to remain weak and ambitious new projects planned before the meltdown worsening the room glut.

The oversupply means room rates should stay low for at least another year, good news for consumers but not so great for hotel owners and the banks that lent them the cash to build or buy.

The rise in delinquencies is sharp. Five times more hotel loans are behind on payments this year than in 2008, according to mortgage data firm Trepp LLC, which tracks those traded by investors. In October, 8.7 percent were distressed, compared with 1.5 percent last year.

That's almost double the 4.8 percent rate for commercial property and the 4.5 percent rate for stores.

"Right now is an absolutely horrible time to be in the hotel business," said Ben Thypin, senior market analyst for market research firm Real Capital Analytics.

What happens when a hotel loan goes bad? Banks are much less willing to seize them than houses because running a hotel requires know-how. But some hotel owners are just handing back the keys where property values have plummeted.

In most cases, it is investment funds falling behind on payments, not major hotel companies. They generally don't own much property, instead franchising brands and earning a percentage of sales.