Some hotel owners who have weathered the coronavirus pandemic are finding that the recent travel rebound may not be enough to persuade lenders to extend new loans as their debts mature in the months or years to come.
Leisure travel has rebounded since the second half of last year, but the recovery has been much weaker for facilities with large meeting rooms that rely on business travel and conferences, in part because many meetings are now being held remotely. While business-focused hotels can attract some leisure travelers, the numbers aren’t high enough to offset the slow recovery among business travelers.
Persistently low occupancy rates for business-focused hotels have pushed down their property values. As a result, lenders are asking hotel owners to provide more capital before agreeing to refinance their loans — but cash-strapped borrowers burdened with debt may not be able to meet the requirements.
Banks are tightening lending standards because the values of certain hotels and other commercial real estate assets have been impacted by changing post-Covid consumer and business habits, said Richard Shinder, founder and managing partner of boutique investment banking and trust firm Theatine Partners. No one knows how these assets will revalue in the future, he said.
“They exacerbate this with higher interest rates, inflation and recession fears. There are several factors that influence lender conservatism … around extending the loan,” said Mr. Shinder.
Hotels have been hit hard by the pandemic, but the sector has also benefited from government bailouts and lenders willing to negotiate easier terms to help them weather the crisis. Now, rising interest rates and slowing economic growth are exposing some hotels that remain in poor condition and potentially pushing them into default.
Advertisement – Scroll to Continue.
In the next two years, loans in the tens of billions will be due, which are secured by hotel real estate as collateral. About $30.9 billion, or about 30% of the $101.63 billion of securitized hotel loans in the US, will mature by 2024, according to the Newmark Group, a commercial real estate brokerage firm inc
Hotels are often funded by three-year adjustable-rate loans, while loans for offices or retail centers are typically much longer, sometimes reaching 20 years. That means hotel owners are more exposed to sudden interest rate hikes and need to refinance debt more often. The Federal Reserve has been raising interest rates at the fastest rate since the early 1980s to fight inflation.
But lenders that offered loan extensions or forbearance in the early days of the pandemic are less likely to lend to the same borrowers because of the economic uncertainties these hotels face, said Michelle Russo, founder and chief executive officer of hotelAVE, a consulting firm , which focuses on the hotel industry, has looked after around 1,000 hotels and currently manages more than 70 of them.
Advertisement – Scroll to Continue.
Ms Russo said one of hotelAVE’s client hotels “received a letter from the bank saying, ‘We just wanted to let you know that after nine months we are not renewing [your loan]. Don’t come to us.”
As many as 10 US hotel owners filed for bankruptcy this January, up from just two in January 2022, according to New Generation Research Inc., a data provider for corporate bankruptcies. Recent bankruptcies have included two major Manhattan hotels, a Holiday Inn in the Financial District and a Crowne Plaza in Times Square.
Still, a major surge in hotel bankruptcy filings is unlikely due to factors such as the high costs associated with the process, said David Neff, a hotel bankruptcy attorney at Perkins Coie LLP. “When things go wrong, many of them just give the keys back [to the lenders]’ said Mr Neff.
Manu Clancy,
Advertisement – Scroll to Continue.
Senior managing director at Trepp Inc., a commercial mortgage data company, said the overall recovery in the hotel sector has been exceptional in recent months, but significant weaknesses remain.
Signs of distress are evident in the Midwest. According to Newmark, around 40% of past due hotel loans in the US are backed by hotels in Midwestern states, including Illinois, Indiana, Minnesota and Ohio.
More and more hotels in the region are facing deadlines. The W Chicago City Center, a roughly 400-room hotel in the city’s central business district, The Loop, has a $75.5 million loan due to be repaid this summer, according to credit rating firm DBRS Morningstar. Its owner, Park Hotels & Resorts inc,
defaulted on the loan amid the pandemic and negotiated with special service provider LNR Partners LLC to only pay interest on the loan until its maturity, when the company expects to repay the loan in full. Interest-only loans are common with commercial real estate, and typically the borrower pays a large lump sum or balloon payment at the end of the term. By September, the occupancy rate at the 22-story hotel with 14,000 square feet of meeting space had recovered to only about two-thirds of pre-pandemic levels.
In downtown Cincinnati, the value of the Hilton Cincinnati Netherland Plaza fell 18% to $86 million in April 2021 from $105.5 million in 2019 when the loan was made. Last fall, lenders on the $72.4 million hotel loan, which matures in October 2024, foreclosed on the property.
“Hoteliers now have a refinancing problem,” he said
Advertisement – Scroll to Continue.
Loren Balsam, hotelAVE’s Chief Investment Officer. That’s partly because some can’t raise more capital to fill the financial gap created by lower property values, which can only support smaller loans, he said. Skyrocketing hedging costs have also been a problem, he added.
Since the Fed began raising interest rates in March 2022, the prices of some hedging instruments that adjustable rate loan borrowers use to offset interest rate volatility have increased from around $10,000 on a multimillion dollar loan to hundreds of thousands of dollars.
At the same time, selling distressed properties has become more difficult. Hotel acquisitions have “slowed significantly since mid-summer” due to rising borrowing costs combined with concerns about an economic slowdown and uncertainty about hotels’ real estate values, said Miles Spencer, co-head of hotels at Newmark.
“The majority of large private equity firms [and] Institutional investors are a bit on the sidelines right now, waiting for signs that it’s time to start acquiring again,” Mr. Spencer said.
Write to Akiko Matsuda at akiko.matsuda@wsj.com
