Hotel & Motel Management - October 15, 2007 - (Page 12)

12 On Finance IN THE details Economic stability coming What led to current state Fundamentals remain strong History will repeat itself By James Merkel H&MM Columnist H&MM October 15, 2007 | HotelMotel.com www.HotelMotel.com/digital_edition The impact of the subprime debacle on hotels E very major event in our industry has its tipping point. Weeks of constant negative news surrounding subprime residential asset-backed securities and related losses in Bear Stearns’ hedge fund have spilled into the commercial mortgage market. Spreads are wider. Underwriting standards are tighter. Proceeds are lower. Transactions are being repriced. As an irrational contagion of fear grips the ﬁnancial side of our industry, it is important to understand that these sudden shifts in our market are not unusual and that the underlying fundamentals of both the hotel industry and the commercial mortgage industry are on sound footing. How did we get here? Multiple factors compounded with the superﬁcial commonalities of our subprime residential cousins have contributed to the current state of the industry, all of which have spillover effects into both the public and private commercial real estate ﬁnance markets. Perception is often reality. The continued proliferation of negative news, unrelated to the commercial mortgage market or hotel market, has resulted in investors demanding additional yield for an increase in perceived risk across all asset classes. Demand for mortgagebacked securities is generally down across the board and supply is increasing. Hedge funds, which accounted for as much as 35 percent of the triple-A paper issued in 2006, are basically sidelined. The natural reaction to attract more demand is to lower the price of an asset—in our industry, this translates into an increase in the yield or interest rate. Why things aren’t so bad While intrinsic asset values tend to be temporarily lost as investors panic and become irrationally concerned about their return of capital instead of their return on capital, the fundamentals of our industry remain solid: Commercial real estate fundamentals remain strong Hotel fundamentals remain strong The overall economy is stable This is arguably not a liquidity crunch so much as it is a credit crunch. ©2007 Hilton Hospitality, Inc. 36USC220506. Minnesota UFOC Registration No. F-1059. Who says you can’t choose your family? Eight distinct brands. And not a mother-in-law in sight. Not that we don’t love in-laws, but we understand. We understand that choosing where to invest isn’t just about investing your money, it’s about investing in a relationship. And when you invest in the Hilton Family of Hotels, you’re investing in more than a property. You’re investing in a philosophy, a promise to be hospitable® When . you invest in one of our eight distinct brands, you’re backed by more than a powerful network of support, you’re backed by a family. So no matter which brand you choose to develop, the Hilton Family will always be there for you. For franchise opportunities, visit hiltonfranchise.com or call 1-800-286-0645. In addition to franchising, we also offer Hilton Management Services, providing strength in numbers and a family tied to performance. For inquiries, please visit hiltonmanagementservices.com. Returning to “normal” With an abundance of fairweather debt and equity players recently attracted to yields in our industry, hotel owners have been teased by easy money policies and systemic mis-pricing of credit that has led to unsustainably low costs of capital. Now we are simply returning to normal and will continue on this path to tighter but more realistic spreads. History will repeat itself. Consider this the next time you are selecting your partners, whether they are contractors, operators or capital providers. The result will be less stress and more stability for you and your organization. hmm@questex.com James T. Merkel is managing director of Columbus-based RockBridge Capital LLC. He can be reached at (614) 246-2505. TM CIRCLE NO. 144 http://HotelMotel.com http://www.HotelMotel.com/digital_edition http://hiltonfranchise.com http://hiltonmanagementservices.com http://hiltonmanagementservices.com http://hiltonfranchise.com

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Hotel & Motel Management - October 15, 2007 Contents Concord Sets Goal to Double Portfolio Leaders: Budgetel Brand Off and Running Pension Funds Put More Capital Into Hotels Perspective Letter to the Editor At Your Risk Consultant's Corner Sales Clinic On Finance Guest Column Trends & Stats Industry Leaders Say Healthy Times Will Continue Eco-Concious Hotels Looks for Certification Events Removing Chemicals, Suds from Housekeeping Products Handhelds Help Track Safe Activity People on The Move Awards Transactions Supplier News Ad/Editorial Index Bath Trends Marketplace Classifieds Checking Out

Hotel & Motel Management - October 15, 2007

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