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My thoughts on the 24th Annual Hunter Hotel Investment Conference

I recently had the opportunity to attend the 24th Annual Hunter Hotel Investment Conference in Atlanta, a National Hotel Investment Conference whose theme this year was Take Charge/Move Forward. I wanted to share my thoughts from the conference with you.

2012 Economy and Beyond, Statistically Speaking

You can feel the confidence coming back! This was the largest attendance ever. The glass is now more than half full. The word cautious has now been removed from cautiously optimistic. The smart money is buying now. The very mild winter has kept heat bills low as a result the consumer has not minded putting more money in their gas tank. The tax cut on payroll will be extended. Both Smith Travel and PKF are very optimistic about the future with PKF being the most optimistic predicting an unprecedented six years of occupancy growth.

Ever since the first quarter of 2010, growth in lodging demand has greatly exceeded the supply increase. The hotel industry keeps getting healthier and investors want in on the upsurge. Pricing for leisure is much more sensitive than corporate. The economy market is just now running a 50% occupancy rate. Luxury, Upscale and Upper Midscale have led the way in occupancy growth. Profit per available room is the most important metric.

Leadership and Experience Panel, Buying & Selling Hotels

Stop focusing on the World’s Doom & Gloom, focus on your individual market and property and the things you can influence. Lack of new supply is helping drive rate. There are 240 U.S. Based Brands. A Brand has to have 200 properties or more to be successful. Focus on rate potential. The next eighteen months are a great opportunity. Be a leader in rate, if you have the right staff, their enthusiasm will help drive rate. Buyers are looking for cash flow, youth in the property, brand and market. Sell your property either before six years or twelve years. Need to have an exit strategy at the time you buy. Timing is important when you sell. Value add is the new thing. The time to buy is now. If you find an opportunity, buy it. The right market is everything. This time period is similar to the early nineties, it will be a slow steady climb for a long time. It will be a great decade for our industry.

Financing Panel

Financing for acquisition is much easier to secure than new construction. For a stabilized hotel with a good sponsor a 65% to70% loan to value, an interest rate of 5.5 to 6.5%, amortization period of 20 – 25 years and a full balloon payment in 5 years is the norm. SBA 7A and 504 can lend up to $5.0M. The participating Bank will normally go up to 50% of the loan amount. The SBA 504 interest rate is currently 4.58% fixed for 20 years. For the right deal SBA will lend up to 85% of value. If you build or upgrade an energy efficient hotel there is no limit on the number SBA loans you can have. It is hard to get a deal done that is not branded. The flag is very important. It used to be location, location, location, now it’s sponsorship, sponsorship, sponsorship. It used to be 85% loan to value, non-recourse, no longer, now they require a personal guarantee.

Presidents Panel

There will be no significant inventory increase until late 2014 or early 2015. New construction is down by 80%. Group Business is coming back. Gas prices will not stop travelers as long as the consumer is confident about job security, unless gas prices reach $5.00 per gallon. The unexpected is now the expected. Google and Apple are entering the OTA Business the Brands are countering the OTA’s with Room Key. The brands did not do a very good job of monitoring the OTA’s. If you have a loan coming due start searching 9 months in advance for alternative financing.

Kiplinger Letter Editor

This year women will make up the majority of the work force, they are better educated. Significant tax reform in 2013 or 2014 regardless of who is in the White House. Obama Health Care will probably be upheld by the Supreme Court. Coal is the hottest commodity in the U.S. we will export 100 tons of coal this year. The U.S. Economy is headed up slowly, consumers are spending more. Consumer spending makes up 60-70% of growth. The U.S. will have a 2.3% economic growth rate in 2012. We will see record high gasoline prices this summer. In 2008 we hit a record high of $4.11 per gallon, this year it will hit $4.50 per gallon. If Israel attacks Iran gas prices could go to $5.00 per gallon. This could put us in another recession. The probability of Israel attacking Iran is very low. Europe is headed into a recession because of their debt woes. This will not put us in a recession. Iraq is the fastest growing Country with a 12% growth rate this year. Republicans will maintain control of the House, the Senate will remain equally divided. We will have 4 more years of President Obama. Higher gas prices will not hurt the hotel business. Room Rates will go up by 5% this year.

Respectfully,

Terry Baltes

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Welcome to our new website

Welcome to the re-designed Baltes Commercial Realty, Ltd. website. We will update this blog on a regular basis with new listings, changes to listings, and messages from our president, Terry Baltes. Here is the first installment of “What is Terry Blogging”?

Hotel performance generally lags economic growth by about four to six quarters. It appears 2010 will be a transition year marring from the steep downturn of 2009 toward a sustainable recovery in 2011. According to the National Bureau of Economic Research, the official referee of the economy, “The Great Recession” officially ended in June 2009.

The key to avoiding a return to recession is housing prices. If between now and spring they decline only a small amount, the recovery will continue. If they lose about 10% on average and the odds of that aren’t that long, Gross Domestic Product (GDP) will shrink. We expect prices to retreat by 3% or so, giving back some of the gain from earlier this year. But the situation is particularly delicate.

The fact is, the economy is stuck in a loop. The sluggish GDP pace means too few jobs are being created to boost demand for housing and to prevent further foreclosures, now caused more by lost jobs than by loans to unqualified borrowers. So the supply of homes continues to grow, and prices to slide. That, in turn, acts as a drag on consumer spending, muting economic growth.

How big is the excess? At least 1 million and maybe as much as 4 million homes. As the economy finally starts to perk up a bit in 2011, about 1.5 million additional U.S. jobs will be created. Home sales and building starts will improve, but the overhang will take years to play out. The only sure cure is time. The question is how painful the interim will be.

Real estate market values fell by about 32% from the peak in mid-2007 to the first quarter of 2010. The price decline was steep and quick, in contrast to previous recessions when write-downs dragged on for several years. Although we cannot predict an exact recovery timeline, we believe we are in the very early stage of the next upturn cycle. The first properties to recover will be the core properties in primary markets. Pricing for the highest quality assets in primary markets has clearly begun to increase in recent months. Pricing for Class B and C properties in secondary and tertiary markets has begun to stabilize, but will appreciate much slower.

With lower Average Daily Rate (ADR), construction financing limited, and net income below levels necessary to justify new construction, supply pipelines are far below long-term averages. The next three years should see a limited amount of new deliveries, setting the stage for a potentially rapid recovery in hotel fundamentals when we experience sustained growth in demand

On September 27, 2010 President Obama signed the Small Business Jobs and Credit Act with new changes to the Small Business Administration (SBA). The loan limit size for 7(a) and 504 loans was increased to $5 Million. To encourage fast action by banks, the legislation temporarily allows a 90% guarantee on a $5 Million loan. This means that the SBA (an insurance agency) will insure 90% of the loan amount. Previously only 75% of the loan was insured and many “nervous” banks curtailed lending.

Although this provision is now scheduled to expire on December 31, 2010, it is an attractive incentive for lenders who seize the opportunity for making loans in the 4th quarter. The extension means the authority for 504 and 7(a) fee reductions and the 90% 7(a) guarantees are through December 31st only, or until $505 Million in appropriations to support them is used. The $505 Million has been allocated to fund SBA loan fees through December 31, 2010 saving borrowers many thousands of dollars. On a large loan the fee was up to 3.5% of the SBA guaranteed portion of the loan. The fee is paid by the bank to the government, but is passed on to the borrower. Existing SBA loan borrowers can qualify for additional loans with the increased lending limit to $5 Million per borrower.

We have more Buyers than Sellers. Our Buyers are well qualified and can secure their own financing. Your rooms meet many of our Buyer’s criteria. Many of our Buyers are purchasing hotels for alternative uses, such as student housing, senior living, etc. These Buyers are paying above market prices for their alternative uses. Our Buyers are anxious to purchase now while interest rates are historically low. Please contact us if you have any interest in selling.

Sincerely,
Terry Baltes
President, Baltes Commercial Realty, Ltd.

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