A quarter of U.S. hotels at risk of foreclosure

by Clay Jarvis31 Aug 2020

A recent report compiled by Trepp and sent to Congress by the hotel industry found that almost one in four U.S. hotels are at risk of foreclosure.

Citing the most recent data available, Trepp reported that the percentage of loans that are 30 or more days delinquent was 23.4 percent as of July. That’s the highest percentage on record, and an incredible 1,746 percent increase from July 2019, when only 1.34 percent of hotel loans were more than 30 days past due. Naturally, the high level of delinquency has left a gaping hole in the CMBS market, where $20.6 billion in hotel CMBS loans were 30 or more days delinquent as of July. In December of 2019, that figure was only $1.15 billion.

“The highest volume of delinquent hotel loans during the Great Financial Crisis was $13.5 billion,” reads the report. “The current percentage of loans that are delinquent now exceeds the highest level during the GFC by 53%.”

Trepp also disclosed that the highest volume of loans in special servicing during the GFC didn’t come until approximately two years after the crisis began. If a similar pattern plays out during COVID-19, hotel owners could be in for a long, nauseating ride.

The delinquent loan balances as of July are simply ridiculous:

  • $1.48 billion in the New York-Newark-Jersey City metro area (53 loans)
  • $976 million in Chicago-Naperville-Elgin (28 loans)
  • $664 million in Houston-The Woodlands-Sugarland (40 loans)
  • $523 million in Los Angeles-Long Beach-Anaheim (23 loans)

The remaining areas in Trepp’s top ten (“top” might be a bit of a stretch) all have delinquent loan balances of at least $169 million, with most sitting at well over $250 million.

"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," Chip Rogers, CEO of the American Hotel & Lodging Association, said in an August 18 release.

The AHLA release goes on to say that “[t]ens 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.”

In a letter sent to Congress on August 18, over 4,000 members of the hotel industry urged legislators to enact the HOPE Act, a bipartisan bill that would provide assistance to small businesses in the commercial real estate sector. The bill, which supporters say would require no additional funding, would provide commercial property owners with additional, temporary liquidity in exchange for a preferred equity interest in their properties.

“Hoteliers are responsible for millions of jobs in communities across the nation, but unless Congress acts, there may not be businesses left for those workers to return to at the end of this pandemic,” said Cecil Staton, president and CEO of the Asian American Hotel Owners Association.

Little can be done to speed the hotel sector’s recovery, especially with the country’s ongoing COVID-19 disaster spilling into its seventh month and the White House quietly changing the CDC’s coronavirus testing standards in a way that will reduce the number of tests being administered. Guests have told the industry what hotel operators can do to make them feel safe once they’ve entered their properties, but until people are once again travelling, en masse and with confidence, the nation’s hotels are bound to remain quiet and dark.

The situation is likely to get worse before it gets better. The percentage of loans on servicer watchlists was 35.3 percent as of July, roughly 2.5 times what it was a year before.