Q&A with Jeff Roike, SVN Senior Vice President, Director Hospitality Council
What’s going on, in general, in the hospitality asset class as a result of Covid-19?
The current average market occupancy rates range between 3% – 20% nationally. The COVID-19 impact on the hospitality industry is worse than 9/11 and the crash of 2008 combined. Larger REIT’s are “shrinking” or “right sizing” their properties, Pebblebrook REIT has suspended operations at 28 of their hotels and expects to cease operations at the remaining 26 by the end of the month. Casino Companies and Disney Resorts have or are in the process of closing their properties. Mid-sized and smaller hotel owner/operators are also strategically closing a portion or all of their hotels. Major brands are significantly downsizing their corporate operations while providing relief measures to their franchisees through delayed PIP’s, reduced or waived royalty and marketing fees, suspended QA inspections, etc.
What challenges is hospitality experiencing in the days and weeks due to Covid-19?
Owners and buyers are stating they have no interest in discussing transactions under the current state of affairs unless they can find bargain deals where they can purchase hotels for pennies on the dollar. Many potential buyers have lost the ability to acquire the equity required to transact due to the drastic drop in the financial markets and current ownership is concerned about meeting their current payroll and mortgage obligations. Owners are also scrutinizing their portfolios and talking about work-outs with their lenders as well as exploring new governmental assistance programs. They say that their portfolio next year will look very different. No banks are lending at this point. This applies not only to asset purchases, but new developments that were on the books as well. More substantial owners are starting to team up with opportunity hedge funds. Chip Rogers, President & CEO of the American Hotel & Lodging Association estimates half of all U.S. hotels will cease operations by the end of March 2020.
What challenges do you see hospitality experiencing in the long-term due to Covid-19?
Challenges will be different depending on the length of the impact as a direct result of the virus. The majority of cancelled events, college competitions, corporate conferences will not come back before the fall, so larger group oriented hotels will suffer for an extended period, but there will be pent up demand. Arne Sorensen of Marriott said that their hotels in China had been down 90%, but now they are starting to re-open. That may be an encouraging signal for an earlier rebound.
Lending institutions have no interest in owning hotel assets and are far more likely to work out a revised/amended loan plan with ownership vs. taking back the asset. This is particularly true should the virus “curve” begin trending down in a 60-90 day time frame as we have seen in China and South Korea. Should the impact extend indefinitely, a significant number of hotels will close permanently.
What opportunities is hospitality experiencing in the near-term due to Covid-19?
While the hospitality sector is the most directly impacted of any commercial real estate asset class, owners have options. Government programs can help with operating costs, and lenders appear to be open to working with borrowers in distress. In addition, hotel space has been described as a possible solution to any shortage of hospital beds.
What opportunities is hospitality experiencing in the long-term due to Covid-19?
Great opportunities to buy will surface as a result of this event so we will have a large opportunity in front of us.
- Deals that can come with discounted debt in place will get sold.
- Servicers will be looking for buyers that can take title in their stead as distressed owners desire to walk away.