Look around, do you see many new hotels? Sure there are some, but look for new constructions as of the past 6 months, there are very few. Las Vegas for example, where hotels are built like water flows, has shown a significant slowdown. The largest project in Vegas history, City Center, is nearly frozen. City Center is actually said to be the single most expensive private construction in the history of the United States at an estimated $9.2 billion. Well, the money isn’t flowing in as easily as developers had hoped, and thats true for the entire industry.
Only about three years ago, a hotelier could build a hotel by financing only about 10% of the project personally. The remaining 90% could be financed by bank loans (funded by CMBCs [Commercial Mortgage Back Securities], and mezzanine debt lenders. That is no longer the case.
To understand this, lets take a quick look into the current economic crisis. Because of the real estate (particularly housing) crash, there was a lot of mortgage default. Because of the mortgage default, banks were unwilling to buy CMBCs from your personal banks, the product that makes mortgages possible. With so much less money to give, loans became ever more difficult to get. Because of this, in today’s market, a hotelier needs to front about 40% of the entire construction cost of his/her property in cash!
It makes simply sense. If hoteliers would finance 90% of their project, then there are many more who could afford the project. Financing 40% of projects that can jump into nine and sometimes ten figures is very, very difficult. So you see, there are few hotels being built.
Amazingly, in markets like New York City, this has caused room rates to skyrocket! There are too few rooms to meet the demand, yet its too expensive to build more rooms!
Luckily for City Center, and many of the new hotel projects in this country today, there is foreign money coming in. Dubai hotel companies are at an advantage, and now Indian hotel companies are stepping in as well.
With the Bush administration’s proposed $700 billion Wall Street bailout, the hope is that mortgages will begin to flow again, loans will be attainable, and you will once again see hotels. More importantly, homes will be affordable to more people, very quickly.
Founder & President
The Early Air Way, LLC