Back in July, I noted how bad expectations were for the other mortgage market -- commercial real estate. In a recession this deep, as businesses fail so do their leases and loans. Bloomberg has a report today about one segment of the commercial real estate market that is doing its part to make matters worse: luxury hotels.

One really dangerous feature of this trend for commercial real estate is the effect it will have on commercial mortgage-backed securities (CMBS). We've heard about how residential mortgage-backed securities (MBS) turned toxic when the real estate bubble popped. As businesses falter, more CMBS will go bad as well.

Here's the luxury hotel connection, via Bloomberg:

Loans secured by more than 1,500 hotels with a total outstanding balance of $24.5 billion may be in danger of default, according to Realpoint LLC, a credit rating company that tracks commercial mortgage-backed securities. Some of the biggest loans, put on the company's watch list because of late payments, decreasing occupancies or cash flow, were made to luxury properties where rooms can cost more than $850 a night.

"All segments are showing signs of distress but the luxury segment carries much higher loan balances and is more clearly affected," Frank Innaurato, managing director of CMBS analytical services at Horsham, Pennsylvania-based Realpoint, said in a telephone interview.

As I mentioned back in July, when just a few loans go bad in a CMBS, the entire deal can quickly blow up. Unlike residential MBS, CMBS pools contain far fewer loans, so each one matters much more.

As for luxury hotels themselves, again this trend probably shouldn't shock anyone. Who, indeed, is paying $850 a night to stay in a hotel these days? As I've noted a few times, the rich are taking a particularly brutal beating during this recession. That, combined with a general decrease in leisure during a deep recession is a perfectly awful storm for luxury hotels.

This also reminds me of another article I read recently from Bloomberg about Marriott's problems with its timeshares. Timeshares are kind of a higher-end option for vacationing as well. Although there is some economic benefit to buying a timeshare instead of paying for more expensive hotel rooms, the timeshares themselves tend not to be very low-end. And if you've ever studied the business, then you know that they have incredibly high interest rates which could compete even with those found for credit cards. In other words, they aren't for the faint of wallet.

I wouldn't expect luxury hotels to rebound anytime soon. The upside, of course, might be great travel deals on luxury accommodations. After all, allowing customers to pay far less for hotel rooms is better than having them sit vacant.

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