This Summerfield Suites in Peabody is one of the few hotel construction projects currently under way in the region.

These days, you can rent a hotel room cheaper than ever. Buying one might be a different story, though.

With the hospitality industry reeling from the recession and Sept. 11 terrorist attacks, daily rates have declined steadily along with occupancy levels, providing deep discounts for the thin cadre of business travelers and tourists who still need lodging. As the difficulties of hoteliers become more pronounced, real estate investors seeking deals are increasingly turning toward that sector, anticipating a rash of sales and foreclosures in the coming months.

In one deal that closed last week, the Procaccianti Group of Rhode Island announced it had purchased the 249-room Hilton Dedham Place in Dedham from TIAA/CREF of New York. Although details were not forthcoming, Banker & Tradesman reported late last year that Procaccianti was buying the $27 million loan on the hotel that the Kurt Saracen Co. had defaulted on several months earlier. Procaccianti officials at the time declined to discuss their plans, but it appears their strategy was ultimate control of the property. The firm reportedly shelled out $17 million to buy the loan.

In the press release, Procaccianti Group Executive Vice President Gregory D. Vickowskki said the company will undertake a $6 million renovation of the four-story hotel later this year, adding that the acquisition of this hotel perfectly aligns with our business model of taking underperforming hotels, upgrading them and re-energizing management to improve competitiveness, market penetration and asset value.

Other players such as Angelo Gordon and the Blackstone Group are amassing financial war chests to pursue acquisitions in the struggling hotel market, but industry observers say they doubt there will be enough deals to satisfy the growing appetite. That is particularly true locally, according to David McElroy, a managing director with Insignia/ESG Hotel Partners in Boston.

There’s a good-sized segment of buyers who are hunting for and expecting to find distressed sellers, but they will be disappointed trying to find those type of deals in the Northeast, said McElroy. I think the supply is going to be pretty limited.

Pinnacle Advisory Group principal Rachel Roginsky concurred, adding that the investment outlook was a popular topic last week at the Americas Lodging Investment Summit in Los Angeles, a major conference attended by more than 1,400 hotel executives, developers and lenders. Even prior to that event, Roginsky said she was being inundated by phone calls from investors looking for hospitality opportunities.

Once a week at least, there are new entities being formed looking to buy hotels, she said. There’s lots of money out there, but there are no hotels for sale at reasonable prices.

The standoff is strikingly similar to that occurring in the office investment market, with buyers setting their pricing expectations far differently than sellers. Although current room rates have dipped precipitously and seem to be spurring the investor frenzy, Roginsky said most hoteliers believe the downturn will not linger indefinitely and will only trade properties based on future income projections.

Investors are looking for pricing based on today’s market, Roginsky said. They want to find [assets] that are troubled, that aren’t able to meet the debt services. But [most owners] feel they can wait to come out of this [slow period] … There’s just a real disconnect between buyers and sellers right now.

McElroy said there are some basic reasons leading to the two sides being at such odds. Investors are being encouraged by historically low interest rates, as well as a general sense that the economy is finally beginning to recover. The recent struggles of the hotel industry has also resulted in a cutoff of construction, McElroy noted, making buyers less fearful of additional supply coming on line.

It was tough in 2001 to get financing for new hotel development, and it’s even tougher now, he said. Locally, such ambitious ventures as Starwood’s planned convention center hotel in South Boston and a Loew’s Hotel proposed by Sawyer Enterprises have failed to get off the ground during the past year. While there are a few projects under way, including a new Summerfield Suites in Peabody, McElroy said those ventures are few and far between.

Asset Management
Potential sellers recognize the dearth of construction activity as clearly as the buyers, McElroy noted. Because of stricter underwriting and a need for more equity in a project, hotels are not as leveraged as they were in the previous downturn, he added, making it less likely they will be forced to cash out.

There will be some foreclosures, but we won’t have anything like what we had in 1991, said Roginsky. The lower interest rates will also make it easier for owners to refinance, an option that did not exist during the credit crisis of the early 1990s.

That does not mean, however, that hotels can anticipate a cakewalk in the near future. A recent report by the Hospitality Research Group said the industry will see a 9.1 percent decline in so-called revenue per available room, or RevPar, during 2002, even worse than the 8.9 percent decline seen in 2001. In the 80 years that our firm has been tracking the U.S. hotel industry, we have not seen annual RevPar declines of this magnitude since the Great Depression of the early 1930s, said HRG Executive Managing Director R. Mark Woodworth.

While no lender likes to see debt-coverage ratios drop, they should be reassured that most stable hotels will still be able to generate enough cash to pay their mortgages, Woodworth continued. Of course, the lower debt-coverage ratios leave less room for error, so the operations need to be carefully monitored. Asset management is now more important than ever.

In that vein, Roginsky’s Boston-based firm has established a new service aimed at helping hotel lenders, investors, owners and operators make it through the choppy waters expected ahead.

Pinnacle’s Hospitality Asset Restructuring Services Group will offer assistance in strategic asset evaluation, market assessment and workout support, as well as transaction services, perhaps helping in the sale of a property or its note or financing new debt. While she insists hoteliers will not suffer the losses seen a decade ago, Roginsky said she believes her experience in that recession, as well as that of colleague Matthew Arrants, will provide owners with ways to cope with the current challenges. Pinnacle might be able to identify a new market niche, for example, or find easy ways to trim a property’s budget.

Many of these hotels don’t think about cost control, and we think that’s something we can help them with, Roginsky said.

McElroy was among those predicting Pinnacle’s service will be welcomed by hoteliers. Rachel can do a great job with them, he said. She’s very well-qualified to help them get through this.

Insignia/ESG Hotel Partners, meanwhile, will continue to root out sales prospects, although McElroy said he expects transactions will be on the low end during 2002, due largely to the bid/ask gap. The company will probably broker about 120 sales nationally, he predicted, with most of the deals likely to be at or below the $10 million mark.