DBRS: Hotel Pandemic Distress Less Than Prior Downturns

COVID-19 hit the hotel sector hard. DBRS Morningstar, Toronto, reported hotels had the highest loan modification rate among major property sectors due to the pandemic but said liquidations were lower than prior downturns.

In a commentary, Hotel Performance Since the Pandemic, DBRS found 713 hotel loans packaged in commercial mortgage-backed securities that were modified or given some form of relief since March 2020, 15 percent of the $95 billion in outstanding hotel loans.

“Because of these relief measures, the flood of distressed CMBS hotel assets was smaller than expected, while loss severities have been much lower compared with liquidations after the Great Recession,” the report said. “As forbearance periods expire, it’s unlikely we’ll see an overwhelming increase in foreclosures even as many operators deal with underfunded reserves, which paid debt service and are critical to remaining competitive.”

The hotel sector should continue to bounce back, boosted by net cash flow that has rebounded close to pre-pandemic highs, the report said.

“Lenders’ willingness to work with borrowers coupled with federal stimulus and lending programs have averted a surge in foreclosures,” DBRS said. “Unlike the Great Recession, when lenders filed a wave of foreclosures on defaulted loans, lenders were more willing to provide relief when hotel owners were forced to temporarily close hotels and/or operate with negative cash flow during the pandemic.”

Loan servicers relied most heavily on forbearance, followed by maturity date extension, the report said. Short-term forbearance relief ranged from using reserves to cover loan payments to deferring loan payments for up to a year, DBRS noted.

“The pandemic disrupted commercial real estate cash flow, with hotels feeling the most dramatic effects,” the report said. “Hotel owners and investors benefited from workout strategies that provided relief to borrowers to fund short-term needs and give distressed loans more time to avoid foreclosure. The good news is that after a few rocky months, travel and tourism have rebounded to only slightly below pre-pandemic levels thanks to healthy leisure demand; however, properties that cater primarily to business and convention stays have improved but still are weaker than before.”

STR, Hendersonville, Tenn., said hotel group demand exceeded 3.5 million room nights sold in January. DBRS called this a sign group demand has awakened and is moving in the right direction.