[co-author: Emma Ellis]
The spread of COVID-19 has created a new reality for the hospitality industry. As of March 25, the CDC reported 54,453 confirmed cases in the U.S., and the number is expected to grow exponentially. In the hopes of slashing infection rates, governments have implemented international travel bans, shelter-in-place orders and other restrictive measures. The second-most popular tourist destination in the world, Spain, has ordered all its hotels and other tourist accommodations to be closed.
Fear has driven many people away from voluntary activities outside the home, and organizations are also preemptively canceling many events due to concerns for public safety. The MLB, NHL and virtually all sporting leagues have canceled or postponed their seasons, citing COVID-19. The City of Austin canceled South by Southwest for the same reason. As of this week, over 112 conferences in the United States have been canceled, postponed or moved online.
The consequences of this disruption for the hospitality industry have been huge, with even large hotel chains feeling the impact. Industry-wide occupancy rates are below 10%, and hotels have already laid off 45% of staff, with more to come. Hilton withdrew its 2020 forecast. Marriott announced the suspension of its CEO’s salary along with a 50% salary reduction for its senior executives. InterContinental Hotels Group projected a 60% drop in global RevPar.
All told, the American Hotel and Lodging Association estimates that the industry has suffered losses of more than $1.5 billion in room revenue since mid-February. Meanwhile, the U.S. Travel Association projects a $355 billion decline in travel spending, and a loss of 4.6 million travel related jobs. The AHLA predicts that that travel industry losses alone will be enough to push the U.S. economy into recession.
Ratings agencies are also sounding the alarm. Fitch Ratings placed 81 classes from its entire portfolio of 15 single borrower hotel transactions on its negative watch list “due to the recent and sudden reductions in travel and tourism and the lack of clarity … on the potential length of the impact.” Citing similar reasons, DBRS Morningstar identified $2.58 billion in securitized U.S. commercial mortgage conduit hotel loans with “elevated risk”, and the potential for a 0.25% increase in overall delinquency rate over that of February.
Hotels are unique real estate assets that present complex legal issues, particularly in times of economic stress. As operating businesses, they have employees (often unionized) and complex contractual obligations among the owner, franchisor and manager. Additionally, they often depend on a significant amount of revenue from food and beverage consumption; sometimes generated by signature restaurants with famous chefs whose business relationships are also important to consider.
What does this mean for lenders and investors in the hotel industry? Lenders and investors should evaluate their positions, taking into account the legal challenges presented by the current market realities. Hotel closures will be costly and have a significant impact on the hotel, its employees and a host of other interested parties.
One new reality is the potential for hotels, conference centers and other locations being requisitioned by the government to act as makeshift hospitals or shelter for quarantine. Over the weekend, New York Governor Andrew Cuomo announced four locations in New York which will serve as temporary hospitals. FEMA has already begun work on one of those locations, a 1,000 bed medical site in the Javits Center. Additionally, New York City has plans in place for using 1,500 hotel rooms for quarantining individuals and other COVID-19 related measures. Surely, more plans are to come, and if so, what are the short- and long- term ramifications for applicable property owners, insurance carriers, lenders and other interested parties?
Hotel owners also have to weigh the immediate revenue and goodwill they may receive for offering their properties for COVID-19 related housing and treatment against the potential long term harm done to a hotel’s reputation. For example, this week, Philadelphia announced the city will begin using a Holiday Inn Express as the city’s first COVID-19 quarantine site. The public may come to associate the hotel with its role during this public health crisis, and following this period, the hotel’s owners may face an uphill battle overcoming the stigma of that association to attract new guests.
Positive governmental action will help mitigate some of the challenges caused by the COVID-19 health crisis. The Senate has passed a $2 trillion stimulus package, and the House is expected to take up the bill and pass it soon. The President is soon thereafter expected to sign the bill but it will take some time for money to reach the intended recipients. Details of the bill are still being examined. Senate staff has prepared a 35 page summary of the bill. We have not been able to check the summary against the actual bill, so readers beware! In addition, the Federal Reserve, the FDIC, the GSEs and the OCC (and other state and local governmental authorities) are all trying to do their part. Only time will tell whether any of this is enough.
We are living in a world that is full of uncertainty and fear. Even with the 24-hour news cycle (or maybe because of it) it feels as if there are more questions than answers. How long will businesses be forced to shutter? Will our economy survive this? What is the infection rate? What is the actual fatality rate? How long will it take for scientists to discover an effective treatment or vaccine? How will we know if we are in the clear? And so on… Perhaps we should take a step back.
One of the most important things we can do right now, and probably one of the hardest, is to remain calm. In the coming weeks (actually, days in some instances), we will have more information and a much better sense of the scale of the crisis and its impact and longevity.
