Standard & Poor’s had downgraded 15 classes of bonds backed by a $425 million loan secured against the Four Seasons Hotel in New York (FS) and 3 other luxury resort hotels. The action was triggered by a drop in cash flow which was 46% below S&P expectations. Surely, the expected cash flow figure had already been discounted in arriving at these expectations, painting this drop as a serious cause for concern in CRE. Occupancy has dropped from 69% in the last fiscal year to just 58%.
The full blown impact of CRE deterioration on the hotel industry could escalate rapidly: according to RealPoint there are over 1,500 loans with a total balance of nearly $25 billion which may be in danger of default.
And he closes with this:
The silver lining: REITs now see cap rates at or below 6% in perpetuity… Which unless they are seeing something in the ultraviolet end of the electromagnetic spectrum that is invisible to everyone else, is almost believable.
As I have been preaching for quite some time here, it should be abundantly clear to everyone in the CRE industry that CAP rates are headed down. Yup.