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The Boom In Leisure Travel Won't Save Urban Hotels From Hungry Distressed Asset Market

With the ever-increasing speed of the coronavirus vaccine rollout, economic impact payments making their way into millions of bank accounts and the warming weather, the travel industry’s comeback may have already started.


March has brought with it a bump in hotel occupancy rates, led by Florida and other vacation destinations that have seen spring break traffic, industry data firm STR reports. The national average occupancy rate was 58.9% in the week ending March 20, nearly 7% higher than the previous week and 85% of the rate during the comparable week in 2019.

The increased activity in hotels over the past month represents hope for a rush in travel in the summer months to come. But such numbers shouldn’t be taken as overall indicators of the market’s health since they coincided with the traditional spring break rush, multiple hotel operators and industry experts told Bisnow.

The pickup in tourism may be too little, too late, and the industry may be on the verge of a much-anticipated wave of distressed asset sales.

The rise in occupancy numbers shouldn’t necessarily be taken at face value, as the statistics may be masking additional pain in the market. It has been common practice since the coronavirus pandemic’s initial outbreak for operators to close off blocks of rooms to save money on energy and cleaning staff and to protect rooms from the increased wear and tear that leisure travelers inflict when compared to business travelers, Ridgemont Hospitality President and Chief Operating Officer Dhruv Patel said.

A side effect of taking rooms off the market is that top-line occupancy numbers have been artificially inflated, multiple experts told Bisnow. Average daily revenue remains lower across the hotel industry compared to 2019 than occupancy rate, and room rates are likely to remain depressed even as occupancy continues to rise because of the desperate place from which hotels have been emerging.

“That’s my major concern as it relates to recovery,” Frontier Development and Hospitality founder Evens Charles told Bisnow. “At some point, it’s going to accelerate pretty drastically, but I am concerned about rates. Everyone is so desperate to get occupancy back up that not all of us are going to be about pushing rate, pushing rate. That means travelers will still likely have a buyer’s market and be able to pick their rooms and rates for some time.”

The Hilton Garden Inn Washington D.C. Downtown hotel at 815 14th St. NW

What improvement there is leaves behind hotels that depend on business travel.

“We as a company are in no hurry to hold corporate get-togethers anytime soon, in New York or anywhere else; it’s just not in the discussion or in our budget for the whole year,” CBRE Global Head of Hotel Capital Markets Kevin Mallory said. “It might be until 2022 until that spending creeps back.”

Unlike the rush that is anticipated in leisure travel, business travel is expected to phase back in gradually over the next few years, starting with individual sales calls and increasing in scale. STR doesn’t project a full recovery to the fundamentals of 2019 — the best year the hotel industry has ever seen — until 2023, and CBRE Head of Hotels Research and Data Analytics Rachael Rothman projects a full recovery in 2025.

In most major U.S. markets where the hospitality industry depends on much more than leisure travel, the largest hotels continue to lose money, depending on federal aid and negotiations with lenders to keep the lights on.

“For the most part, lenders have been pretty cooperative in deferring payments until the end of the loan term and providing forbearances,” Charles said. “In some cases, they’ve provided extensions for when loans mature or converted us to interest-only [payments].

“I’d consider us to be fortunate because there are a lot of hotel owners in pretty bad predicaments today,” said Charles, whose company owns and operates select-service and compact full-service hotels under Hilton and Marriott brands in the metropolitan areas of Washington, D.C., Nashville, Tennessee, and Columbus, Ohio. Frontier has also participated in both rounds of the Paycheck Protection Program.

The prospect of a recovery that is now visible but could remain years away has hotel owners hanging on for dear life, but if and when debt workouts expire, many will run out of options and be in worse distress than they would have been had lenders foreclosed last year, University of Denver’s Fritz Knoebel School of Hospitality Management associate professor Amrik Singh said.

“At the conclusion of the loan modification period, if the property is still in distress, the state of the distress is more severe,” Singh said. “As we go further along, most of these properties, if the distress is not resolved, then we could see a greater number of foreclosures or [lenders taking possession]. It’s getting closer to that point.”

STR Senior Vice President of Lodging Insights Jan Freitag speaking at Destination D.C.'s 2018 Annual Marketing Outlook Meeting

About 434 hotel properties backed by CMBS loans and 145 multi-hotel CMBS loans are in severe distress, a status that covers more than 90 days of delinquency, foreclosures, special servicing and real estate-owned properties, according to Trepp data analyzed by Singh. More than two-thirds of those properties have already received some form of forbearance or loan modification. 

Yet there remains little doubt that unlike with retail (and office, to an extent), the pandemic didn’t accelerate previously existing trends in hotel — it turned them upside down. That gives investors confidence in the long-term strength of hospitality assets, leading to the massive buildup in investment capital waiting for distressed assets to drop like fish food in a heavily populated koi pond.

“There is a lot of money on the sidelines eager to jump in [on distressed assets], because there was this idea in April of last year that there would be a ton of distress,” STR National Director for Hospitality Market Analytics Jan Freitag said.

Because the sheer competitiveness of the distressed market is likely to keep prices from reaching the discounts that some may have expected a year ago, heavy activity will come before foreclosure sales, with debt funds purchasing mortgages or offering bridge loans. That activity has already begun in earnest and may be forestalling a foreclosure wave in concert with stimulus money and lender negotiations, CBRE's Mallory said.

Those bridge loans will be crucial to keeping many hotels operating and paying senior lenders but with even more expensive terms and more paths to ownership for the new lenders, Lubert-Adler Real Estate Funds principal Jessica Morgan said at a Bisnow digital summit in early March.

The W Hotel at 8 Albany St. in downtown Manhattan, which has permanently closed.

“You could purchase a note, work with the borrower, restructure it, change the term or get into some equity upside,” Morgan said. “And on the downside in that scenario is just getting repaid. So you ultimately have a good risk-adjusted return.”

Another driving force behind the private debt market is that institutional debt remains cautious and unsure about the prospect of loans getting paid back, said Mike Haas, co-founder of hotel capital markets research firm CRED iQ. 

“What I’ve seen is that so far, there have hardly been any hotel loans that have been securitized on the CMBS market,” the University of Denver’s Singh said. “That tells me that lenders are still wary about the industry given the uncertainty, so we don’t know when they’re going to step back in and securitize new loans.”

The most urban market of them all, New York, is a case study in why that class of hotels is far from out of danger. Bankruptcy cases are accelerating on top of several major closures that happened months ago in the city. By the time it all shakes out, CBRE projects that 20,000 rooms will be permanently removed from the city's inventory.

Many of those closed hotels could be targeted as redevelopment opportunities, which is in the plans of a surprising number of investors waiting on distressed assets, Haas said. That could be due to the tax and upkeep expense of owning even an out-of-business hotel, which is why lenders have been so reticent to foreclose, CBRE's Rothman said.

With redevelopment as an option, private equity firms are seeing opportunities to give bridge loans, wait for the borrower to default on the new debt, take possession and redevelop, multiple sources told Bisnow. A redevelopment project could even be completed in many markets in less time than corporate business for hotels to recover, increasing the motivation to foreclose or facilitate a deed-in-lieu deal sooner. 

A sizable number of loans have forbearance periods that end in April, Haas said. With the fate of negative-cash flow hotels in the hands of lenders, the clock might be running out a little bit faster for whatever hotels are left out of the expected tourism rush.