CHESSNOID

I know the Dubai Debt Debacle was the biggest news on the stock markets yesterday and then it is Black Friday.  I am not sure how big of an effect they will have on the US economy.  On top of unemployment and foreclosures, I think the commercial side of real estate is about to make some news.  We already know about the empty offices, but now hotels are letting their finances become known.

Associated Press:

They have been enticing travelers all year with sweet deals: credits for in-house spas and restaurants, up to 50 percent off five-star rooms, even free nights.

But all that discounting hasn’t stopped occupancy from dropping an average of 10 percent. The result? Hotel loans have begun falling into delinquency faster than any other kind of commercial real estate debt.

The rising defaults paint a grim picture for an industry with increasingly more rooms than guests, and more hotels still opening every day. It’s a problem that could get worse before it gets better, with demand expected to remain weak and ambitious new projects planned before the meltdown worsening the room glut.

The oversupply means room rates should stay low for at least another year, good news for consumers but not so great for hotel owners and the banks that lent them the cash to build or buy.

The rise in delinquencies is sharp. Five times more hotel loans are behind on payments this year than in 2008, according to mortgage data firm Trepp LLC, which tracks those traded by investors. In October, 8.7 percent were distressed, compared with 1.5 percent last year.

Why is this so bad for the US economy?  Well if the hotels default on these loans someone has to take a hit.  And that would be:

What happens when a hotel loan goes bad? Banks are much less willing to seize them than houses because running a hotel requires know-how. But some hotel owners are just handing back the keys where property values have plummeted.

In most cases, it is investment funds falling behind on payments, not major hotel companies. They generally don’t own much property, instead franchising brands and earning a percentage of sales.

Most of the 1,231 U.S. hotels and casinos with troubled financing are remaining open. So, in the short term at least, consumers can expect to see deals on room rates for at least another year. Executives at STR Global, the hotel research firm, expect demand to rise 1.6 percent in 2010, but average rates to drop 3.4 percent.

Not in the 20 years the firm has collected hotel data has supply and demand been so far apart — not even in the early 1990s recession or after Sept. 11, 2001.

The hotels can file bankruptcy to try and get things restructured.  Banks may not want to take back the hotels.  However, if hotels can’t be profitable, the bank may not have a choice if the owners send back the hotel keys to the banks.  Now that is some big Jingle Mail.