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.
President, Baltes Commercial Realty, Ltd.