US hotel loan defaults could rise on falling leisure stays, climbing costs

Walker & Dunlop

21/09/2023 23:07

By Matt Tracy
       Sept 21 (Reuters) - U.S. hotel owners could see greater
pressure on their ability to service the loans backing their
properties, as a decline in leisure stays coupled with rising
costs are expected to pinch their profits. 
    In the second quarter, many hotel owners reported rates of
leisure stay anywhere between 25%-35% above 2019 levels. 
    But as the surge in travel after the pandemic wears off,
demand is shifting away from pricey leisure stays and towards
lower-rated group business travel, according to a Wednesday
report from ratings agency Fitch.
    Leisure travel will likely fall further in the event of an
expected recession in the first half of 2024, the Fitch report
noted.
     "If there’s a recession, hospitality is the first-in and
the first-out of any downward trend," said Willy Walker, CEO of
commercial real estate lender Walker & Dunlop  WD.N . 
    Several hotel owners defaulted on loans backing various
hotels in 2020, when travel plummeted at the start of the
coronavirus pandemic.
    According to a Thursday Moody's report, nine of the 19
commercial mortgage-backed security (CMBS) loans that liquidated
in the second quarter of 2023 were hotel loans that initially
defaulted in 2020, selling at a loss after the borrowers failed
to work out a solution to avoid default. 
    Among these were a loan backing the Marriott Buffalo
Niagara, as well as one behind the Hilton Garden Inn in Ames,
Iowa.
    Rising labor, energy and insurance costs will further pinch
the wallets of hotel owners, according to Fitch, adding to their
risk in making interest payments.
    The greatest cost burden for hotel owners stems from
insurance rates, Fitch noted, especially for hotels in areas
most exposed to climate chaos.
    Perhaps the hardest-hit in this category are hotels along
the coast of Florida. 
    “It would not be a surprise if every hotel owner on Miami
Beach is facing not just an increase in hurricane, flood and
wind storm insurance premiums, but at a multiple of 2-3x," said 
Eric Goldberg, co-chair of the real estate law practice at
Olshan Frome Wolosky. 

 (Reporting by Matt Tracy; Editing by Shankar Ramakrishnan and
Stephen Coates)
 ((Matt.Tracy@thomsonreuters.com;))