The lodging industry has bent but not broken. While it feels like we’ve been living life in limbo, treading water or maybe even swimming upstream since March, the good news is that if you’re reading this then you’re probably still in business.
Hotels in the United States support 1 in every 25 American jobs. In an average year, more 1.3 billion guests (comparable to more than 17 percent of the world’s population) stay in an American hotel room. Remember in late 2019 when everyone expected an economic downturn and the only questions were, “When?” and “How would it impact the hotel industry?”
The second and third quarters of 2020 have answered the question of when. The near future will answer the question of its total impact. After six-plus months, the U.S. Bureau of Labor reports that 4.8 million hospitality and leisure jobs have been lost since February. Occupancy rates are below 50 percent in many sections of the country. STR and Tourism Economics project revenue losses of 50 percent for 2020.
The upshot is that owners, operators and brands have been working together to do what needs to be done with less income.
Deals, Deals, Deals
The lodging transaction market has been lean, to say the least. The reasons are multiple and vary by market, but they really boil down to just a very few. Lack of product offering seems to be the No. 1 issue. Owners are fearful of putting properties out for fear of finding out what they may really be worth. Lack of debt sources and a shortage of cash among the typical buyer pool contribute to the concerns for potential sellers. Apprehension that markets may recover quickly leads to indecision on whether to go to market now or wait until next year: should we wait until after election results are fully sorted out? Should we wait to see if a second stimulus bill is coming? Will lenders be more receptive in the short term? Debt availability may be the main support to selling price values. What should we do?
Despite the downturn, the United States can weather the financial fallout of this downturn due to the lessons learned from the 2008-2009 financial downturn. The Dodd-Frank Wall Street Reform and Consumer Protection Act required much larger cash reserves to cover outstanding loans, strengthening banks’ ability to weather market downturns. Thus far, banks have been able to work with many hoteliers through forbearance and restructuring of loans. At some point, and it’s likely soon, these traditional lenders will no longer have this option available to them as regulatory authorities and depositors/investors become less comfortable with nonpayment of the obligations.
The other primary debt source, commercial mortgage-backed securities, also largely is shuttered. Its attractive terms, low interest rates and lack of personal guarantees made it a popular financing option over the last decade. It’s roughly estimated that more than 20 percent of all hotels in the United States have commercial mortgage-backed securities debt. When payments are not current, CMBS loans are placed in special servicing. In some instances, the servicers had the ability to work with struggling borrowers, but those times are passed. Many of these properties will be under new ownership in 2021.
The glimmer of good news on the debt front is the Small Business Administration programs remain accessible, but the SBA administrators and the associated banks are much more conservative in their underwriting. Private lenders and seller financing have become more active channels in recent months.
The first and second quarters of 2021 will be a harbinger of things to come. Likely, a significant number of nonperforming, and otherwise distressed, assets will be brought to market and many will transact. Other owners will see the wave coming and will move to action toward a sale before pricing gets further dampened by too much product competing for investment dollars. Debt platforms will return as the economy picks up the pace toward full recovery but that is in the future, not in near the term.
What You Can Do
One operator’s misfortune spells “opportunity” for another. The current commercial real estate market for hotels has investors with cash on one end, anticipating deep discounts of as much as 50 percent. On the other side, the owners of hotel assets struggle to make the properties they own work at lower occupancy rates.
What can you do today? Speak to lodging real estate professionals and gather information on what seems likely to happen in your market. Transactions are still happening, primarily in the sub-$8 million space. Now may not be a bad time to sell, or buy, depending on the circumstances.
2021 will be bumpy but timing will be crucial for both buyers and sellers. The annoying “bid/ask” gap will tighten from both directions and deals will happen at a much more active pace than 2020.
Steve Kirby is managing principal at Mumford Company.