Publications

Vacancy — big time: The badly bruised lodging industry fights to stay afloat
- November 1, 2020: Vol. 7, Number 10

Vacancy — big time: The badly bruised lodging industry fights to stay afloat

by Mike Consol

People must have a place to live; consumers a place to shop; businesses a place to conduct commerce; manufacturers a place to make, store and distribute their wares. But when the economy goes bad, one of the first forms of commerce to suffer is travel — both for leisure and business — and that is a dagger for the hotel business.

Never has the hotel business been slammed so quickly and sharply as during the current coronavirus crisis, which saw its occupancy rate shrivel to just 24.4 percent in April, according to data from STR Inc., down from 71.2 percent one year prior. Though occupancy has since recovered to something closer to 50 percent as of August, that was not good enough to stop the Baird/STR Hotel Stock Index from sliding by 7.1 percent in September. Through the first nine months of 2020, the stock index is down 36.8 percent.

At the risk of piling on the bad news for investors, Trepp, a firm that tracks the mortgage-backed securities market, reported that as of July, 23.4 percent of U.S. hotels were 30 or more days behind on their debt payments, marking the highest level ever, up from just 1.3 percent at the close of 2019. Some 34 percent of hotels in New York City, the nation’s premier lodging market, are delinquent on their debts, according to a CNBC report. Hotel delinquencies are also said to be rising “significantly” in Chicago, Houston and Los Angeles, among other cities.

The Los Angeles Times reported that the Chateau Marmont hotel is going to be converted to a “members only” property. A hotel spokesperson told the newspaper, “The pandemic showed that safety was of the utmost importance to guests, and limiting the hotel to select members ensures that management knows all guests before they arrive.”

After exercising forbearance considering the extraordinary circumstances, lenders’ patience is becoming exhausted, and foreclosure is reportedly looming for some major urban properties.

The American Hotel & Lodging Association and hundreds of industry executives sent a letter to Congress requesting financial relief.

Chip Rogers, the organization’s CEO wrote to congressional leaders: “With record-low travel demand, thousands of hotels can’t afford to pay their commercial mortgages and are facing foreclosure with the harsh reality of having to close their doors permanently. Tens of thousands of hotel employees will lose their jobs and small business industries that depend on these hotels to drive local tourism and economic activity will likely face a similar fate.”

Though hotels and airlines have experienced an uptick in business after having plummeted in the spring, the rebound appears to be weakening as a new economic stimulus package from Congress has stalled.

Oddly enough, some developers are moving forward with new hotels, as the construction pipeline was stuffed with projects before COVID-19 struck. Developers had 217,000 new hotel rooms under construction in September 2020, according to STR, up from 215,000 at end of June 2020 and 202,000 this time a year ago.

Jan Freitag, senior vice president for STR, was recently quoted explaining: “If your hotels are 50 percent to 75 percent complete, those hotels are going to get done.”

 

Mike Consol (m.consol@irei.com) is editor of Real Assets Adviser. Follow him on Twitter @mikeconsol to read his latest postings.

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