The Hotel Times - December 2008 - (Page 12)

CAPITAL OUTLOOK » BY JAMES T. MERKEL Wait for market stability, then act Fear, volatility must subside before capital markets come back T he forecast for 2009 looks grim for the hospitality industry. The ﬁnancial crisis coupled with a global recession has frozen the credit markets. This massive capital dislocation will remain until fear abates and conﬁdence in the ﬁnancial system returns. The U. S. government’s $700billion bailout plan may have produced a momentary calming effect on Wall Street, but effectiveness in opening up the capital markets is yet to be seen. The ﬁnancial industry must complete a massive deleveraging before the capital markets can fully recover. Until this process runs its course, cash is king. Taxing carried interest as ordinary income and imposing new regulation on loan services could discourage capital formation. Fundamentals must stabilize We are in the beginning stages of an industry downturn. Growth has slowed and turned negative. The uncertainty surrounding the market creates a cloud over the future. Operational costs must stabilize. Energy costs are steadily increasing, brand requirements are increasing, and labor costs could be severely impacted by substituting the card-check initiative in lieu of secret ballots. Airline and travel costs must return to rational levels. Further, corporate travel and leisure travel must return to a steadystate level and transient travelers need to return to the road. Supply and demand must remain in balance. Current credit market conditions should result in an enormous attrition rate for new projects in the development pipeline. Until the markets stabilize: Lenders will require additional yield for the perceived risk. Expect underwriting to focus on lower loan-to-value ratios and higher debtservice cover ratios. Lenders will rely on recourse to further mitigate their risk. Sponsors with a history of success and execution will be favored. Lending by local and regional banks with existing relationships continue to enjoy some traction. A return of properly priced mezzanine debt is expected, but there will be a lack of meaningful long-term ﬁxedrate debt for the foreseeable future. hmm@questex.com www.TheHotelTimes.com Restore conﬁdence Financial institutions must deliver— this point is critical to recovery. Loans that were never meant to be held on the balance sheets of ﬁnancial institutions must clear before new lending can take place. Going forward, more conservative underwriting standards will be customary. The secondary market must be restored, providing additional liquidity to the marketplace. The “bid-ask gap” must tighten. Lenders are currently indicating that the gap is too wide to underwrite loans with conﬁdence. Consumer conﬁdence must rise. Consumers need to feel conﬁdent in their jobs and feel conﬁdent to spend. The commercial real estate market needs to establish a ﬂoor. Limited transactions in a falling environment equates to minimal market data to establish value. And, falling values with balloon payments coming due in a tight credit environment is a volatile mix. James T. Merkel is president of RockBridge Capital LLC. He can be reached at jtmerkel@ rockbridgecapital.com. 12 The Hotel Times December 2008 http://www.TheHotelTimes.com

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The Hotel Times - December 2008 Business Outlook Contents In the News Where is the Bottom? Capital Outlook Timeshare Report In Closing

The Hotel Times - December 2008

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