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Hotel Delinquencies Keep Falling As Tourists Bring Sector Back From The Brink

Hotels have had it tougher than any commercial real estate sector during the past two years, but it looks like the worst is over. Not only are occupancy rates rising, especially in tourist-heavy markets, but the flood of delinquencies is also receding as more hotels recover and heal.

Delinquencies soared in the wake of the pandemic’s onset in March 2020, as hotel lobbies emptied out and stayed empty in markets around the U.S. By June 2020, the delinquency rate for loans backed by hotels and packaged into commercial mortgage-backed securities, or CMBS, surpassed 23%, totaling more than $20.6B in loans at least 30 days late. The rate was 10% for all other commercial real estate sectors, according to data compiled by Trepp.    

But 2021 was a relatively good year for CMBS loans, a popular tool to finance both hotels and retail. The volume of delinquent CMBS hotel loans steadily declined and ended the year at an 8.79% rate, with $7.23B of loans considered late.

Experts say it looks like the sector will continue to see those numbers sink further.

Las Vegas

“We expect delinquencies to continue getting squeezed out of the system,” Trepp Senior Managing Director Manus Clancy said.

The reason for that is simple. Many once-delinquent hotel owners started garnering enough revenue to bring their loans up to date, or were able to inject more equity, while other severely delinquent loans were sold off.

“In December, at least 16 loans were disposed of, and that’s quite a high number,” said Amrik Singh, an associate professor at the University of Denver’s Fritz Knoebel School of Hospitality Management.

Five to 10 loans disposed of was normal for a given month, he added, and Singh expects the percentage of hotel-backed CMBS loans considered delinquent will fall to around 5% by the end of 2022. That is still far above the 1% to 2% average seen in healthy times.  

So far, the big fire sale of hotels originally expected after the pandemic hasn’t happened, Singh said, and investors hoping to pick up properties for low prices piled up a lot of capital targeted at hotels. That has been a big help to borrowers, as all that capital now needs someplace to go, and hotels now filling up with leisure travelers no longer look like such a bad bet.

“We don’t see them being disposed of at large discounts,” Singh said. “Some of the loans were disposed of with no loss at all.”

One of the largest hotel loans made current in 2021 was the $231M Hammons Hotel Portfolio loan, which covers 1,869 rooms in seven hotels in seven states, all with a Hilton or Marriott flag, according to Fitch Ratings. The loan was sent to special servicing in June 2020. It was still more than 90 days delinquent as of June 2021, but the servicer and borrower agreed to new terms after a new equity partner agreed to come aboard with a much-needed cash injection.

The hotel sector’s improving financial performance has also pushed down the percentage of loans considered delinquent because lenders stood ready in 2021 to securitize loans again, adding more healthy and current loans to the market.

“The lodging market’s fundamentals have really picked up,” Singh said. “Lenders are starting to securitize hotel loans again, and that’s an indication of how they feel about the market.”

Even though the hotel sector isn't fully recovered, there has been a turnaround from its dark days in the spring of 2020. In March 2020, overall occupancy collapsed to just 20%, according to Trepp, citing STR data, and for all of 2020, it was 44%. But on Thanksgiving week in 2021, occupancy in the U.S. lodging sector hit 53%, up 4.6% from the same period two years earlier. And by the week before Christmas, conditions got even better. Occupancy stood at 53.8%, up 7.7% from the same week in 2019. 

Delinquencies among CMBS loans

The hotel sector soured a bit when the omicron wave swept over the nation, Trepp added, with occupancy levels falling below 50% in January and below levels seen in January 2019. With the omicron wave receding, optimism is starting to return in many metro areas. In its fall real estate forecast, the Urban Land Institute stated occupancy in 2022 will reach more than 58% and in 2023 will further increase to almost 62%, higher than the 20-year average.  

Lenders have also started to reverse course, Trepp found. In Q2 2020, CMBS lenders securitized $673M in hotel loans, or 7.5% of the total, and almost all of that was attributed to one loan for the 9,748-room MGM Grand and Mandalay Bay resort in Las Vegas. In 2021, more than $12.8B of securitized loans were backed by hotels, or 11.75% of the total.

Still, there is a long way to go before the market returns to normal. In 2021, 134 CMBS hotel loans were issued, Trepp found, but in pre-pandemic years, that number would fluctuate between 400 and 600.

Certain portions of the hotel sector are doing better than others, Clancy said. Those now in the best position are hotels catering to tourists in popular destinations such as beach towns.

“They are all the way back and are getting premium prices for rooms and have high occupancies,” he said. “Hotels up and down the California coast and up and down the Atlantic Seaboard are thriving.”

The group he calls the happy middle, ones at least on the path to recovery, are hotels serving places like college towns that bring in big crowds on game days or other leisure travelers. The third group consists of cities like Chicago and New York that will take much longer to recover. Although both attract a hefty number of tourists, each also depends heavily on business travel. That remains scarce, and the problem will likely persist.

“A big problem is that CFOs of many firms have fallen in love with not spending money on travel,” Clancy said. “Why spend money on a flight when [a meeting] can be done in 15 minutes on a Zoom call?”

Hybrid work schedules, with many employees only showing up to the office two or three days a week, could also make arranging in-person meetings difficult and stifle the return of business travelers.

“It makes it much harder for a sales guy to show up and make a pitch,” Clancy said.  

CMBS loans aren’t the only ones that fell into trouble during the pandemic. According to the Mortgage Bankers Association, 10.5% of the balance of all lodging loans, not just CMBS, were delinquent by the end of 2021, compared to 1.8% of the balance of office property loans and 1.4% of multifamily loans. But the amount of hotel loans delinquent stood at 14% at the end of Q3 2021, and in December, the number of loans that fell behind in their payments by 30 days slowed to a trickle, according to Jamie Woodwell, vice president in MBA’s research and economics group.

“We’ve seen fewer and fewer loans come into that early stage.”