About $31B of CMBS loans backed by hotels are set to mature by 2024—roughly 30% of the total of nearly $102B in securitized hotel loans in the US—and some hotels that rely on business travel and conferences are facing a reckoning as lenders demand more capital from them to refinance—or tell them not to come back at all.
Many hotel loans are floating-rate packages with three-year terms, giving hotel owners more exposure to interest-rate hikes, with a constant need to refinance their debt. Hotels in business districts that cater to business travelers and conference attendees are struggling to refinance loans on properties that have seen values plunge during the pandemic.
Unlike their counterparts geared to resurgent leisure travel and tourism, business-oriented hotels still are suffering from depressed occupancy levels as the rise of remote work shapes a new paradigm with less business travel.
Lenders that had offered loan extensions or forbearances in the early days of the pandemic are less likely to lend to the same borrowers because of economic uncertainties facing those hotels, according to a report this week in the Wall Street Journal.
Lenders are requiring hotel owners to put up more capital before they refinance loans on properties that have seen values shrinking—in some cases telling the owners nine months in advance of a loan’s maturity that they have no intention of extending or refinancing the loan, WSJ reported.
Ten hotel owners in the US filed for bankruptcy in January, up from two in January 2022, according to New Generation Research Inc. Recent bankruptcies included two large hotels in Manhattan, a Holiday Inn in the Financial District and a Crowne Plaza in Times Square.
Nationally, the overall recovery of the hotel industry has what Trepp calls “sizeable pockets of weakness.” According to a recent report from Newmark, signs of distress are pronounced in the Midwest. Roughly 40% of delinquent hotel loans in the US are backed by hotels in Midwestern states including Illinois, Indiana, Minnesota and Ohio, the report said.
As interest rates have risen, the prices of hedging instruments that floating-rate borrowers use to offset interest-rate volatility have risen to hundreds of thousands of dollars from an average of $10K for each multimillion-dollar loan.
WSJ cited W Chicago City Center, a 400-room hotel in the Loop, Chicago’s main business district, as an example of the challenging lending environment in the Midwest. The hotel had a $75M loan coming due this summer.
The hotel’s owner, Park Hotels & Resorts, defaulted on the loan in the middle of the pandemic and negotiated an arrangement with a special servicer to pay only interest on the loan until its maturity, when the owner will make one payment in full, known as a balloon payment.
Last fall, lenders foreclosed on the Hilton Cincinnati Netherland Plaza, which had a $73M loan maturing in October 2024. The property’s pre-pandemic value of $106M fell to $86M in 2021.