The long-term problems underlying the commercial mortgage-backed securities limited-service hotel sector have finally come to fruition recently, market observers say, as the carry-through of actual defaults and last week's downgrade of the Fairfield Inns-Marriott International CMBS credit rating by Standard & Poor's Ratings Services have been a cause for some alarm.

Despite the fact that property markets are doing quite well overall, the always-volatile hospitality sector has been particularly problematic recently, as an oversupply in the level of development of new hotels has "[exacerbated] the cash flow problems of existing properties," said Peter Kozel, an S&P analyst. Because of this, several deals that have a significant lodging component have either been put on CreditWatch negative or downgraded.

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