Hotel Performance Is Weakening Just As The Industry Hits Its Own Debt Maturity Crisis

Nearly every sector of commercial real estate is caught in some version of the same bind: facing a spike in debt maturities this year and next, with high interest rates and bank pullbacks making refinancing historically difficult.

Hotel owners in the U.S. with maturing debt are feeling the same pressure. But given more volatile income streams than nearly every other sector, hospitality real estate is on a razor’s edge all its own. Though it doesn’t face the same existential crisis as office, the hotel sector is softening at an inopportune time.

U.S. hotels had a disappointing second quarter, especially considering the strength of the economy over the same period, CBRE reported in August. The commercial real estate services giant adjusted its full-year projections for national revenue per available room growth down from 6% to 4.6%.

That softening comes as a historic number of hotel-backed loans are set to mature. Over the next few months, CMBS loans backed by over 1,500 hotels are coming due, said Amrik Singh, a University of Denver professor who studies hotel finance and the hospitality CMBS market.

Because of the day-to-day costs in the hotel industry, operators may be quicker to pull the plug and either turn properties over to their lenders or give up on investing in their buildings, prompting lenders to appoint special servicers and receivers to step in, Singh said. This could create a pool of distressed assets with more appeal to opportunistic investors than property types where adverse ownership takes longer to manifest.

“I think the extend-and-pretend days are coming to an end, especially when banks look at sponsors and find they’re not putting in enough cash at the property level, nor enough cash in the reserves,” Ridgemont Hospitality President and Chief Operating Officer Dhruv Patel said.

Less Money Coming In, More Money Going Out

Despite some positive signs for forward bookings heading into autumn, individual business travelers still haven't hit the road at nearly the same rate as they did before the pandemic, leading more to believe that the new normal has arrived.

“The business transient traveler, that one-to-two-day, quick-hit business trip, I think we’ve all settled into the understanding that it’s never coming back,” said Patel, whose company owns hotels near Oakland International Airport and Google’s headquarters in Mountain View, California. “Though I hate saying never, it’s going to take a while, at least, for us to see those trends reverse.”

The San Francisco Bay Area has been hit especially hard by the shifting trends of the past three years, but even in secondary and tertiary markets, hotel operators used to relying on business travel are seeking alternate revenue sources, The Vonne Group President Davonne Reaves said.

The Vonne Group owns two hotels in Indianapolis that cater to leisure travelers and a Home2 Suites by Hilton in Oklahoma that gets a large share of its business from contract workers staying for a few months at a time, Reaves told Bisnow. But as the property heads into a slower season, The Vonne Group has enlisted a third-party asset manager to help find cost savings and generate ideas for repositioning the hotel for other types of guests.

“The asset manager is an extra set of eyes,” Reaves said. “We’re just trying to be creative when it comes to marketing and bringing in revenue-enhancing opportunities.”

In larger markets, it isn’t just business travel that has disappointed this year. The “revenge travel” phenomenon that bolstered tourist hotels and resorts the past two years has shifted in 2023 from domestic travel to more Americans taking international trips. And due to a lower rate of visa issuance for foreign nationals seeking to travel to the U.S., inbound tourism hasn't made up the difference, especially on the West Coast, Patel said.

Visitor visa wait times are over two years for travelers from many U.S. consulates in Mexico and Canada, according to the U.S. State Department, and well over a year in several cities in India. Though some major international cities have wait times of only a few days, others like Madrid and Melbourne have wait times of several months to more than a year.

“I personally have family in India that couldn’t get a visa to come visit for a wedding,” Patel said. “To apply for a new visa to come here is a big issue, which is an impediment for hotels.”

While success stories in hotel markets like New York are keeping national fundamentals relatively strong compared to 2019, it isn’t just debt that has become more expensive for hotel owners. Everything is pricier, just like it is for the average consumer.

By far the most concerning rise in expenses for hotels is in staffing and wages, Reaves said.

Hotel wages grew 5.5% in July, bringing the industry’s compound annual wage growth rate to 8% since the pandemic began, CBRE reported in a Sept. 8 research brief. As a result, profits have declined in each of the past three months. 

The Vonne Group is working with its asset manager to cut costs wherever it can, taking an especially hard look at staff, Reaves said.

“We’ve been working on really keeping an eye out to mitigate expenses, especially when it comes to staffing, and really just going through the P&L line-by-line and seeing what can be cut,” she said. 

As long as room supply outstrips demand, hotel owners aren’t able to push room rates high enough to compensate for cost increases because it would make them outliers in their local markets, Patel and Reaves said. 

“We can’t charge too much. We have to go by what the market says,” Reaves said. “That’s been an issue, competing with other hotels who may have a different strategy than we do. So we have to be more aggressive when it comes to marketing and think out of the box.”

For small corporate groups, the most active form of business travel right now, Ridgemont is offering discounts to compete for their business.

“We feel kind of stuck,” Patel said. “There’s margin pressure through the roof.”

Debt Pain And Distress Opportunities

Even in high-performing markets, strong results aren't necessarily enough to provide security for a hotel owner facing a debt maturity, Singh said.

“Newer loans that are being securitized have more conservative underwriting requirements, and for hotel owners with loans securitized pre-Covid or back in 2013 to 2015, higher revenue levels are not sufficient to cover the new level of debt service required,” Singh said. 

That difficult equation is only relevant if an owner can find a lender willing to make a new hotel deal. Between May and July, only seven new CMBS loans were originated for hotels, a new pandemic low, CBRE reported.

Though debt is difficult to come by for every form of commercial real estate, hotels are even worse off when economic outlooks are negative because their revenue can dry up overnight.

“With uncertainty in the economic environment, there’s higher risk in hotels, so there’s more caution because there’s more risk of default,” Singh said. “So underwriting requirements will be much higher than for other property types.”

Before the pandemic, hotels would account for 10% to 15% of an average multi-asset CMBS loan, Singh said. That ratio is down to between 5% and 10%.

“Bigger banks have national policies [in place] that they’re not doing any more deals in hospitality,” Patel said. “We’ve been told by banks that they’re overallocated in hotels, but they’ve heard other regional banks are still lending aggressively. If you’re buying a property and a bank understands its market and its community, they’ll be more inclined to do that deal. But large national guys are creating policies of not touching entire asset classes right now.”

As in other asset classes, one of the reasons so many hotel-backed loans are maturing this year and early next year is because so many were already extended when business was still at all-time lows in 2020 and early 2021, Singh said.

But with the volatility inherent to hotels, extensions aren’t as obvious a move as they are in multifamily and office. Lenders are asking for borrowers to put up sizable cash reserves to insure against interest rates rising even higher, Singh and Patel said. 

Facing either a default or a cash payout to keep holding a hotel, large owners that suspect their properties are worth less than their loan balance are likely to return keys to lenders the way Ashford Hospitality Trust did with a 19-hotel portfolio this summer, Singh said.

Smaller owners may simply give up and force lenders to appoint a receiver and/or find a short seller to avoid foreclosure auctions. That could create the type of deal that distressed asset buyers crave, Patel said: a property that just needs a better owner to help it reach its full potential.

“I think there’s already distress in the market,” Patel said. “Guys are out there looking for equity. They know debt markets don’t like them, they may be trying to find a partner and a path forward, but I think we’re there.”

Ridgemont and The Vonne Group both have several years until their own loans mature because they took out fixed-rate loans when interest rates were near rock bottom in 2020 and 2021. Although the frozen debt market also makes acquisitions of any sort challenging, companies with enough liquidity could see opportunities to take over distressed properties popping up at any time.  

“We’re patiently waiting on the sidelines, and we’re in a strong cash position,” Patel said. “We’re in no way eager or desperate to get in on any deals, but we already have had lenders asking us because they have a loan going bad and know we can operate a turnaround. So we expect our phones to be ringing because lenders don’t want to operate hotels or auction them off.”