Interest Rate Roundup

Monday, January 26, 2009

Layoffs, more CRE problems, and more

It's another ugly Monday morning on the news front, especially as it relates to jobs. Heavy equipment maker Caterpillar says it will slash 20,000 jobs due to slumping demand for construction gear (It had 113,000 workers at the end of 2008). Wireless company Sprint Nextel is also chopping 8,000 of its workers. Other companies reportedly weighing layoffs -- or already cutting jobs -- include Home Depot (7,000), Starbucks, Pfizer (19,000), and Eaton (5,200).

Meanwhile, the problems continue to spread in key sectors of the commercial real estate market. The latest beset by woe? Hotels. As the Wall Street Journal noted in a story today ...

"The downturn in the U.S. hotel industry is becoming so acute that it has thrust the sector into crisis, leaving vacancies at a 20-year high and putting many properties in danger of missing payments to lenders.

"In the wake of cutbacks by business and leisure travelers alike, U.S. hotels this month are expected to post their 15th consecutive month of declining occupancy, longer even than their 12-month losing streak after the Sept. 11, 2001, terrorist attacks.

"That occupancy drain, coupled with declining room rates as hotels compete for customers, is expected to result in the hotel industry's steepest decline in revenue per available room since 2001, according to market-research company PKF Consulting Inc. The report, scheduled for release today at the American Lodging Investment Summit in San Diego, says that revenue per available room will fall by 9.8% this year.

"If conditions are as weak as expected, PKF estimates that nearly 20% of a sample of 1,500 U.S. hotels that it studied won't generate enough cash flow this year to cover interest payments on their mortgages, up from nearly 16% last year. This year's projection is on par with the most recent high of 20.7% in 2003 but still short of the 1991 recession's 25% tally, according to PKF.

"U.S. hotels now carry roughly $250 billion in cumulative mortgage debt, according to Foresight Analytics LLC. Many hotel owners who can't generate enough cash to cover their debt service in this recession will avoid default and foreclosure by digging into their own or partners' resources to make up the shortfall or by negotiating a compromise with their lenders."


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