Realty Check

Published: Monday, 20 Jul 2009 | 12:54 PM ET

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Tomorrow the bank holding the $40 million loan on Washington DC's Watergate Hotel, New York-based PB Capital, will put the foreclosed property up for auction. 

The 251-room, formerly grand, 12-story lodging has been empty since 2007.  Just the memories of those few burglars who slept there the night before they did their historic deed still haunt the hallways. 

Some say that's reason enough to snatch it up, and there are plenty of interested bidders.

The owners, Monument Realty, tried to sell it but couldn't, so now it's up to the bargain hunters.  But in today's commercial real estate market, it's not exactly going going gone.

For one thing, it needs many millions in renovation.  For another, there are a quarter million in property taxes owed.  And for the lucky winner, securing financing to get the place even close to inhabitable will be dicey at best.  One investment broker tells the Washington Post, "Hotel development financing is impossible."

In June three loans of over $100 million each, collateralized by hotel properties, defaulted, pushing CMBS delinquencies up 48 basis points.  "Hotel performance has continued its expected sizable decline, with revenue per available room levels down 20 percent to date, and cash flows expected to decline by at least 35 percent from peak levels," says Susan Merrick, Managing Director and U.S. CMBS Group Head at Fitch Ratings.

According to Fitch, last month 13 hotel loans totaling $596 million defaulted.  These included big ticket properties in Phoenix, Las Vegas and New york.  Fitch expects hotel delinquencies to continue to grow.  

"With no immediate revival of demand in sight and recent-vintage hotels loans unlikely to meet projected performance levels, loan sponsors are increasingly depleting reserve accounts or are being forced to come out of pocket to service debt shortfalls, each of which are a precursor to potential future default," adds Merrick.

I didn't need Fitch to tell me that.  I was on vacation in Maine last week and stayed a few days at a lovely resort by the sea.  It was the all-inclusive type, where one price gets you full meals and lots of kid-friendly, camp-like activities.  Upon checking in, I asked if we could still get on the pirate cruise. 

No problem. 

What about the lobster bake which I forgot to pre-register for?  No worries there.

The weather was gorgeous, mid-July sunshine, the blueberries ripe, the lobster abundant, the staff incredibly helpful and friendly.  One morning, at breakfast in the hotel restaurant, as my kids were fighting over the bowl of pancake syrup, I warned, "SHH!  Come on, we're in a restaurant!" 

Whereupon my daughter replied, "Why does it matter?  There's nobody else here."

She was right.

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