Hotel industry recovers along with the economy

February 20, 1994|By Timothy J. Mullaney | Timothy J. Mullaney,Staff Writer

Stephen F. Bollenbach and Jack Pechter are looking at the hotel business a bit differently these days.

Mr. Bollenbach, chief executive of Host Marriott Corp. of Bethesda, plans to spend one or two billion dollars buying depressed hotels. Mr. Pechter closed his Quality Inn in Towson in October to make way for a shopping center, saying the 33-year-old motel wasn't worth the money it would cost to renovate.

It's a strange time for hotels. As the industry snaps out of a recession that hit it harder than nearly any other part of the economy, there's enough good news to bring dealmakers like Mr. Bollenbach out of the foxholes and grabbing his checkbook. Then again, there's still a lot of reason to sit tight.

After a disastrous 1991, the hotel industry earned an estimated $3 billion last year. It stands to make $6 billion in 1994. Yet only four full-service noncasino hotels are under construction in the United States, Mr. Bollenbach said. Hotels on average are worth only about 60 percent of what they cost to build. And the head of Maryland's hotel industry association said occupancy in the state's roughly 650 hotels and motels lags behind national levels.

The widest contradiction may be the difference in prospects for shiny first-class hotels like Host Marriott's, and those for older roadside spots like the Towson Quality Inn.

The winners in all this have been the entrepreneurs -- and their investors -- who had the money and the moxie to buy first-class hotels in 1992 and 1993.

"We've been getting from day one well above 10 percent" return FTC on the investment, said Ira Leubert, a partner in GF Management Inc. of Philadelphia, which bought the Sheraton Baltimore North in Towson in 1992.

Things have sure changed in the past three years.

The hotel industry lost $5 billion in 1990 and another $2.4 billion in 1991, according to a study by the Smith Travel Research of Gallatin, Tenn.

Room occupancy, which peaked in 1979 at 72 percent, fell to about 61 percent in 1991, said Roger Cline, worldwide director of hospitality consulting services for the Arthur Andersen accounting firm.

Hotels, which usually begin to make money when occupancy reaches 65 percent, hit 64 percent last year and will top 65 percent this year, he said. Maryland's 650 hotels and motels posted a 62.6 percent occupancy rate through November.

Among those wounded by the slump was the former Marriott Corp., Maryland's biggest lodging company. It was stuck with so many unwanted hotels and so much construction debt that its bond rating plummeted and its stock price fell to $8.875 in late 1990. That same stock is now worth more than $40.

The company split itself into two companies last year: Host Marriott, which assumed the risk of owning the 130 hotels that the old Marriott planned to sell but couldn't; and Marriott International Inc., which makes money principally by managing 784 hotels that belong to Host Marriott and others.

But the old Marriott was not the only hotel company on the ropes in 1990 and 1991. Prime Motor Inns Inc., former owner of the Ramada Inn and Howard Johnson chains, entered Chapter 11 bankruptcy protection in 1990. Days Inns of America went under in 1991.

And thousands of smaller operators, many of them real estate developers who got into the hotel business for the first time in the 1980s, went down also.

Locally, downtown hotels like the Radisson Lord Baltimore, Peabody Court (now called the Latham) and Omni Inner Harbor were returned to lenders. South Charles Realty Corp., a sister company to Maryland National Bank which managed its soured assets, repossessed 20 hotels and motels. The Annapolis Ramada filed for bankruptcy. At least four hotels in Hunt Valley were put up for auction or sold after mortgage defaults.

The usual suspects in the late-1980s real estate bust were to blame: new tax laws that scared away investors, overlending by banks and an influx of foreign investors who were willing to pay inflated prices for properties.

The biggest problem was overbuilding, based on confidence that rising property values would eventually bail out hotels that were so expensive they could not pay their mortgage and still turn a profit. In Baltimore, the competition downtown pushed hotel occupancy to 58 percent in 1991.

Nationwide, the 3 million room industry added almost 800,000 new rooms between 1981 and 1990, even after subtracting the hotels that went out of business, Smith Travel Research said.

Now, as the industry recovers, the irony is that limited-service economy hotels -- the cheaper facilities that didn't get their owners into as much financial trouble during the recession -- are starting to get left behind.

While these hotels are the ones being most actively traded today, sophisticated investors shopping for bargains are turning their sights to more luxurious, harder-to-duplicate business hotels and resorts.

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