Posted on: Tuesday, June 19, 2001

U.S. hotels struggling to make debt payments

Bloomberg News Service

NEW YORK — More U.S. hotels are defaulting on their debt payments amid a decline in demand for rooms, consultants say.

Defaults have risen to an annual average rate of 2.5 percent this year from 1.9 percent in 2000, said Sean Hennessey, director of the New York hospitality practice for PricewaterhouseCoopers.

The hotel industry is grappling with a decline in demand as U.S. economic growth slows, leading corporations to cut their travel budgets. The 30 percent rise in defaults highlights that hotels, whose occupancy rates change daily, are especially sensitive to economic changes.

"The industry has always been one that is subject to default, and we're seeing a natural process where in a downturn those properties that are weakest run into problems," said Hennessey.

Older mid-priced hotels are having trouble competing against newer chains that have expanded in the past few years, such as Fairfield Inn. Some newer hotels haven't generated enough cash flow to meet their debt requirements after opening in the difficult environment, said Hennessey.

Growth in revenue per available room, a measure of demand in the industry, fell in April at the fastest rate for U.S. hotels since 1991, according to Smith Travel Research. For the year, revenue per room will rise 2.1 percent, compared with 5.7 percent in 2000, PricewaterhouseCoopers said.

Many of the hotels defaulting are mid-priced hotels in the southeastern United States built in the 1990s in response to population growth and the 2000 Atlanta Olympics, said Bruce Ford, sales and marketing director for Lodging Econometrics, a hotel consulting firm.

Hotel supply in the region grew faster than in the rest of the United States from 1998 to 2000, according to Smith Travel Research.

"There are just more hotels down there, bottom line," said Ford. "When you reach a trough or a little bit of a softening, some don't make it."