THE OIL / NATURAL GAS PRICE COLLAPSE AND ITS IMPACT ON HOTELS

Written by Bill Stuckeman & Sonny Torres

Boom – yes / Bust – big time / Bounce Back -??????

In August of 2014 the Average Price of West Texas Crude was $95.00 a barrel. Hotels that were located in the heart of the oil and natural gas patches in North Dakota, Pennsylvania, Texas, Ohio and other “oil patch” areas were experiencing 90% + occupancy levels with record levels of room revenue. Life was good for hotel owners, guests and employees as well as the Lenders that provided financing for the hotels, many of which were CMBS shops.

By August of 2015 the price of oil had fallen to $45.00 a barrel and the impact to hotel demand was starting to be felt. Workers were being told that they no longer were needed but soon there would be a recovery and all would be well.

By the end of 2015 and into the first part of 2016 the price of oil kept falling as did hotel

demand. By the end of March 2015 Room Revenue declines were in excess of 60% compared to the end of the previous year.  Most owners of hotels, being the responsible and optimistic breed that they are, had funded out of their pockets huge shortfalls in debt service and in many cases operating expense shortfalls. By late spring of 2016 many owners had exhausted their cash reserves and started reaching out for ways to obtain relief from their Lenders.

Today, 1st Service Solutions is serving as an advisor to owners on 16 hotels with an outstanding loan balance of $117MM. All of these loans were originated in 2013 and 2014. Almost everyone, including the special servicers are experiencing a “Deer in the Headlight” syndrome because no one knows where oil prices will go and how long it will take to get there. Special servicers are generally willing to work with responsible and dedicated owners to find a basis to develop a resolution strategy.

Owners and Lenders are both sharing the chilling dramatic decline in property values. To date, over 67% of the property values have fallen off a cliff. Everyone generally agrees that oil and natural gas demand will bounce back. The BIG question is when and to what level and who takes the risk while all parties wait.

We believe the risk needs to be shared and that there are structuring resolutions which will serve the best interests of both CMBS bondholders AND owners.