"Last straw" for NYC hotel industry?

David Goldsmith

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Ashkenazy looks to push hotel into bankruptcy
Lender filed motion to protect $45M leasehold mortgage after ground rent default

In an “extremely unusual” situation brought about by the economic fallout of coronavirus, Ashkenazy Acquisition has found itself in the position of forcing a borrower into bankruptcy to protect its collateral.

The investment firm filed an involuntary Chapter 11 petition in late April to force the 190-room Surrey Hotel at 20 East 76th Street into bankruptcy, Commercial Observer reported. The move came after the hotel owner, Denihan Hospitality Group, missed its ground lease payment for April.

Ashkenazy, which took over a $45 million leasehold mortgage on the hotel in 2018 — when it was already in maturity default —would see its collateral wiped out if the ground lease were terminated, the motion notes. The lender accuses Denihan of “working with the ground lessor” to terminate the lease.

“Ground lessor seeks to take advantage of a worldwide crisis as a means to take back the valuable ground lease,” Ashkenazy’s lawyers wrote in the filing, noting that bankruptcy court is “the only available forum for relief at this time as the New York State courts are closed to commercial disputes.”

Although CO could not determine the identity of the ground lessor, Surrey Realty Associates LLC, property records indicate that the Kaufman Organization was the owner of the fee interest as of 2009.

A source told the publication that Ashkenazy’s filing is “anything but a regular bankruptcy,” as it is much more common for borrowers to file for bankruptcy to stave off foreclosures, and involuntary bankruptcies tend to be filed by several parties rather than just one.

With the coronavirus crisis reducing the value of the hotel to less than that of the loan, it may have made economic sense for Denihan to simply lose the ground lease and back out of the deal, the source noted.

David Goldsmith

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Times Square Edition to close after only a year
The lender on Maefield’s 20 Times Square project moved to foreclose in December

Marriott International has given notice that the Times Square Edition hotel will be shuttering this summer. It’s the latest in the ongoing saga at Mark Siffin’s 20 Times Square project.
Marriott’s notice comes after the operator warned the hotel owner, Maefield Development, back in March that the owner could go into default on its contract as a result of the pandemic, Bloomberg reported. Now, the hotel operator is making good on the warning and yanking its flag.

The Edition brand — created by boutique hotelier Ian Schrager and Marriott — opened the 452-room hotel last year at 20 Times Square. The mixed-use project, once appraised at $2.4 billion, has significant digital signage and retail space. Tenants include Hershey’s and previously, the NFL Experience, a joint venture between the National Football League and Cirque du Soleil.

Marriott’s closure of the hotel represents the latest setback for Maefield. In December, one of the developer’s lenders, French bank Natixis, filed to foreclose on the project. Natixis claimed $650 million of the $2 billion financing package it put together was in default due to “undischarged mechanics’ liens."

When the project began in 2012, Maefield’s partners in the venture included Steve Witfkoff, Winthrop Realty Trust, the Carlton Group, Howard Lorber’s New Valley and Fortress Investment Group. But Maefield and Fortress bought out the other partners in 2018 with the $2 billion financing.

Many hotels, already operating on thin margins before the coronavirus brought business to a halt, have been pushed to the edge as a result of the shutdown.
The owner of another hotel in Times Square, the Hilton on West 42 Street, wrote down the value of the property to less than its $77 million mortgage earlier in May and warned investors that it may hand it over to lenders, according to Bloomberg.

David Goldsmith

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Hotel occupancy hovers around 35% after Memorial Day boost
Occupancy rates hit a low of 21% in April

Hotels are slowly clawing their way back from pandemic purgatory.
National occupancy rates climbed to 35.4 percent between May 17 and 23, according to weekly data released by STR. That’s up from 32.4 percent the week prior, and it marks the sixth consecutive week that rates have improved.
Occupancy hit a low of roughly 21 percent in early April, and crossed the 30 percent threshold in the first week of May.

Jan Frietag, STR’s senior vice president of lodging insights, said it was “no surprise” that the highest levels of daily occupancy were recorded on Friday and Saturday, ahead of Memorial Day. All 50 states have begun re-opening at least some businesses and rolling back stay-at-home orders and other restrictions.

While hotel fundamentals are on the up, year-over-year figures show just how badly the industry has been battered by the coronavirus pandemic. Last week’s 35.4 percent occupancy rate marked a 50.2 percent plunge from a year ago. Average daily rate was down 39.7 percent and revenue per available room fell 69.9 percent year over year.

Fundamentals in many major markets are worse than the national averages, although four of the top 25 markets in the country — New York City, Tampa/St. Petersburg, Norfolk/Virginia Beach, and Phoenix — saw occupancy levels above 40 percent.

About 45 percent of hotel rooms in New York were occupied last week. RevPAR climbed about $2 to $54.47 and daily rate about 30 cents to $121.29.
Last week’s occupancy rate in the Los Angeles/Long Beach market climbed 2 percentage week over week to 37.8 percent. ADR and RevPAR also increased last week, hitting $105.88 and $40.04, respectively.

The state of California and local governments have rented rooms for vulnerable homeless locals throughout the pandemic as a way to safely house people and support a devastated hotel industry. More than 3,200 rooms have been rented in L.A. County alone, but logistical issues and personnel shortages have hampered the program.

Miami’s 29.3 percent occupancy rate was an improvement from 26.5 percent the week prior and the closest it’s been to 30 percent since the middle of April. ADR fell week over week to $80.50 from $81.15 a week earlier, but RevPAR climbed to $23.56 from $21.49 a week earlier.

Chicago went into the pandemic with a little over half of its rooms occupied and while last week was an improvement, the market is still performing poorly. Occupancy climbed 2 percentage points to 28.2 percent. ADR has been more or less flat at less than $72 all month. RevPAR improved last week to $20.19 from $19.17 a week earlier.

Oahu Island’s 12.7 percent occupancy rate was the lowest among major markets. But Orlando and Boston also had a bad week, with 22.5 percent and 22.8 percent occupancy rates, respectively.

David Goldsmith

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BD Hotels defaults on Watson Hotel mortgage
Lender HSBC is marketing the non-performing note for sale

The cracks are starting to show in New York City’s hotel market.
Richard Born and Ira Drukier’s BD Hotels — the largest boutique hotel company in the city — has stopped making payments on their mortgage on the 600-room Watson Hotel on Manhattan’s West Side, sources told The Real Deal.
Now, HSBC, which provided BD Hotels with a $42.5 million loan in 2011 to finance its leasehold on the hotel at 440 West 57th Street, is looking to sell the non-performing loan.
Representatives for BD Hotels and HSBC could not be immediately reached for comment. The loan matures April 1 of next year and has an unpaid principal balance of $33.9 million, according to marketing materials.
Brokers handling the loan sale are pitching it as an opportunity to easily reposition a hotel that is free from a managing or branding agreement. Alternatively, it could be torn down and redeveloped for other purposes.

“The property’s zoning allows an investor to reimagine the prime 57th Street frontage into multifamily or office space, neighboring some of the most coveted developments in the city,” a teaser for the loan explained.
Eastdil Secured is marketing the loan. The brokers could not be reached for comment.

Hotels across the city are feeling the effects of the Covid-19 induced shutdown, which ground tourism to a halt and forced many to shutter their doors and layoff staff.
While some lenders have been willing to offer forbearance to mortgage borrowers who are struggling to make payments, others are moving on from the troubled loans.

The tony Mark Hotel at 25 East 77th Street recently went into default, and the special servicer on the hotel’s $115 million commercial-mortgage backed securities loan scheduled a UCC foreclosure auction.

David Goldsmith

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TRD Insights: Hotel CMBS delinquencies jumped in June
Think loans backed by retail and mixed-use properties are bad? Look at lodging

Hotels’ occupancy rates have been rising, but their loan troubles are through the roof.
Hotel delinquencies among commercial mortgage-backed security (CMBS) loans rated by Kroll Bond Ratings Agency reached 21.6 percent last month, up from 13.6 percent in May. That was the highest among all property types, with delinquencies on loans secured by retail and mixed-use properties at 12.8 percent and 9.4 percent, respectively.

Even though hotel loan delinquencies spiked last month, there’s some evidence that they might begin to level off. The percentage of CMBS lodging loans whose borrowers were late on their monthly payments in June fell to 6.4 percent, down from 12.4 percent in May 2020. A payment made within the 30-day grace period is late but the loan is not yet delinquent.

Single-asset CMBS hotel loans appear to be faring better than portfolio loans. All three of the Kroll-rated single-asset or single-borrower and large loan transactions transferred to special servicers since the pandemic started were backed by portfolio loans. Those loans, totaling more than $2 billion, were secured by 186 hotels across the country owned by Atrium Holding Company, Hospitality Investors Trust and Tom Barrack’s Colony Capital.

For lodging conduit transactions, or CMBS transactions backed by loans from multiple borrowers secured by multiple lodging properties, the delinquency rate is even higher. Conduit loans secured by lodging portfolios saw delinquencies jump to 24.4 percent in June, up from 15.7 percent in May.

Many hospitality companies loaded up on CMBS debt in the years leading up to the current financial crisis. Just as the coronavirus hit the United States, outstanding hotel CMBS debt ballooned to $85 billion.
Now the companies are struggling to get loan modifications from their special servicers, many of which are overwhelmed by a tidal wave of requests for relief.

David Goldsmith

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Hotels’ comeback stalls nationally, skids in NYC and Miami
Occupancy flat last week as two major markets see worrisome declines
Hotels’ recovery appears to have stalled.
From mid-April through June, occupancy rates climbed steadily following their historic coronavirus plunge. But they fell in the week ending July 4 and last week they were essentially flat, according to newly released data from industry tracker STR.
Occupancy rose by 0.3 percentage points to 45.9 percent in the week ending July 11 from the week prior, which ended on Independence Day, STR figures show. Small markets are performing better than large ones: The occupancy rate in STR’s top 25 markets was just 39.2 percent.

Nationally, hotels also made less money on the rooms they did rent. Revenue per available room, or revPAR, which takes into consideration the rates hotels are able to charge as well as occupancy, fell by 3.3 percent, to $44.67 from $46.21, week-over-week.

Hotel occupancy in New York extended its weekly slide to six weeks, falling to 37 percent from 40.1 percent week-over-week. Post-coronavirus pandemic occupancy peaked at 47.6 percent in the last week of May. revPAR also fell in New York to $46.62 from $52.51 — an 11.2 percent drop.

Miami hotels, perhaps suffering from a surge in Covid cases across Florida, also saw notable slides in both occupancy and revPAR from the week before. Occupancy fell to 30.4 percent from 33.6 percent, while revPAR plummeted by 21 percent to $32.87 from $41.61.

Only one of STR’s top 25 markets — Norfolk/Virginia Beach — had more than 60 percent of rooms booked last week, and just barely. Detroit and Atlanta were the only other markets with half or more of their rooms booked, at 54.9 percent and 50.1 percent, respectively. Both improved from the week prior.

Bear in mind that occupancy rates do not take into account hotels that are closed.
The number of coronavirus cases nearly doubled from July 1 to July 14 from around 169,000 to nearly 302,000. Late last month, Miami-Dade County began renting hotel rooms to isolate Covid-19 patients.

Los Angeles, where coronavirus cases are also on the rise, saw occupancy rise from 43.9 percent to 45.1 percent week-over week. RevPAR gained a few cents to $54.02.
New York has driven its Covid daily death count down to single digits, but Gov. Andrew Cuomo did impose a 14-day quarantine requirement on visitors from many states, possibly hurting hotels.

California Governor Gavin Newsom ordered most indoor business and activities to close once again as cases shot up in a number of counties following reopenings statewide.
Chicago’s occupancy rate and revPAR were essentially flat compared to the first week of the month, with 36.6 percent of rooms rented and a revPAR of $31.36.

David Goldsmith

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W Hotel in downtown Manhattan closes forever
The 217-key establishment will lay off 137

The W Hotel in downtown Manhattan is the latest to close its doors for good.
The 217-key hotel at 8 Albany Street, which boasts suites with walk-in rainforest showers and reflective snakeskin tiles, will shut down Oct. 13, Bisnow reported. According to a notice filed with the state by Starwood Company & Resorts, 137 hotel workers will be let go.
Hotels have been devastated by the coronavirus. The industry saw dismal occupancy rates in March before a slight rebound after many establishments closed, but rates nationally have stalled in July.
In New York City, occupancy levels — which do not take into account closed hotels — have fallen for six straight weeks after ticking up in May. And hotels that are open are earning less than usual — revenue per available room fell nationally by 3.3 percent, to $44.67 from $46.21, week-over-week.

Hotels have looked for alternatives as the pandemic has brought travel to a near halt. In New York City, ritzy hotels housed medical staff and non-critical patients in the height of the coronavirus outbreak in March and April. After an outcry from homeless advocates and health experts, the New York city government moved thousands of homeless persons living in congregate shelters into hotel rooms. That has had some unintended consequences in Midtown.

The re-envisioning of hotel space in New York City could take several paths. New York University was scouting for additional dorm space as it prepared for classes in the fall, while one Midtown hotel that closed in June hinted that it was ripe for conversion to office space.

David Goldsmith

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How much are NYC hotels hurting?
The five boroughs have a swollen pipeline of hotel projects, and revenue is moving in the wrong direction as the market inches closer to a recession

During a recent earnings call, Starwood Property Trust CEO Barry Sternlicht broached a touchy topic in the real estate world: the possibility of a recession.
The head of the $56 billion real estate investment trust told investors and analysts that “the only thing we have to worry about is a calamitous recession,” warning of a slowing economy largely thanks to the national political environment.

Specifically, Sternlicht said Starwood needs to be “über-careful” in the hotel sector because of a potential oversupply.

Developers have, in fact, been churning out hotels at a blistering pace. And New York is one of several U.S. cities (along with Miami) that have seen a boom in hotel construction.
As of May, there were more than 18,700 hotel rooms across 112 new developments under construction or being planned in the five boroughs, according to NYC & Company, the city’s tourism arm. That includes a 128-key Hotel Indigo in the Financial District and a 137-key Six Senses resort and spa at HFZ Capital Group’s “the XI” development in Chelsea.

Meanwhile, Marriott and hotelier Ian Schrager opened their roughly 450-room Edition hotel in Times Square this year, and just last month the same chain opened a 285-room Moxy in the East Village.
Those properties are just a few of the newbies. If all of the planned rooms are built, there will be nearly 139,000 rooms citywide by the end of 2021 — a 15.5 increase over the middle of this year, NYC & Company’s data shows.

A second-quarter report from the financial firm PwC painted a less-than-rosy picture for the Manhattan hotel market.

“Continued increases in supply, coupled with pressures on demand stemming from continued trade tensions and slowing economic growth, are having a profound impact on Manhattan hotels,” PwC’s Warren Marr said in the report. “In addition, inbound leisure travel from China was also impacted due to the devaluation of the yuan.”

Others — including Jim Butler, who chairs the global hospitality group at L.A.-based law firm Jeffer Mangels Butler & Mitchell — said pricing for properties in top U.S. markets like New York has generally peaked, making it a good time to sell.
“It’s still a good market and they’re getting good prices,” he said, noting that there is good reason to invest in “irreplaceable locations and buildings.”

But, he said: “It’s great to diversify risks and good to be taking chips off the table.”
How many chips to take off the table is the big question.
The hospitality industry has historically been a canary in the coal mine — one of the first segments in real estate to get hit when the market starts turning. That’s because it’s low-hanging fruit for both consumers and businesses to cut back on hotel stays.

In the wake of the 2008 financial crisis, the key metric for gauging hotel performance — revenue per available room, or RevPAR — plummeted nationally. And New York was hit harder than most, with RevPAR free-falling by 27 percent between October 2008 and 2009.

There are already red flags this time around.
In August, hotel research firm STR downgraded its projected 2020 RevPAR growth nationally to 1.1 percent from the 1.9 percent it had projected in June. And New York is the only major market in the country where STR projects a decline in RevPAR — albeit of just 0.8 percent — in 2020. Year-to-date RevPAR was down 3.6 percent in the city from the same period last year.

While economists have been chattering about a downturn for a while, all signs now suggest that it’s imminent. Most economists expect the recession to really hit in 2020, which is expected to be a particularly hard year for the hotel industry.

The Federal Reserve Bank of New York’s recession probability indicator — which gauges the likelihood of a recession within the coming 12 months — skyrocketed from around 10 percent at the beginning of 2019 to 37.9 percent in August.

Oversupply is a key concern for hotel owners in a recession, said attorney Joshua Bernstein, co-chair of the hospitality sector team at the law firm Akerman. Established hotels and brands are better positioned to weather a downturn, he said.
“New supply is generally a greater risk for [owners of less-established properties] because they have no existing reputation in the market and no cash flow to rely on, so they’re at risk of some large debt liabilities,” he said.

Exposure and opportunities
In New York, smaller boutique hotels, particularly those in the outer boroughs, are more vulnerable to a downturn than their larger Manhattan counterparts, sources say.
Boutique hotel development has exploded since the last recession, with nearly 40 percent of hotels planned since 2013 including fewer than 70 rooms, according to a July TRD analysis.

Smaller developers often build boutique hotels outside of the city’s core. But those properties are at risk in a down market, said Douglas Hercher, principal and managing partners of hospitality investment banking firm RobertDouglas.
“In a recession, the market pulls back into Manhattan,” said Hercher. “Those assets that aren’t as conveniently located can suffer — Secaucus, Brooklyn, Harlem.”

In New York, developers and lenders have yet to show much concern about a potential turn in the market.

In March, Bank Leumi USA issued a $45 million construction loan for Maddd Equities and Joy Construction’s 203-room project on West 48th Street in Hell’s Kitchen. That same month, Lightstone Group refinanced its recently opened 349-key Moxy Chelsea with a $155 million loan from LoanCore Capital and KSL Capital Partners.

Goldman Sachs is also betting on the sector. It refinanced the debt on at least two hotels this year — $115 million for the Sapir Organization’s 264-room NoMo and $88 million for CBSK Ironstate’s 249-key Pod Hotel in Brooklyn.
While CMBS hotel debt is still available in major markets, including New York, it’s not coming as easily as it is for office properties and other assets, said Manus Clancy, a senior managing director at Trepp, which tracks securitized mortgages. Overbuilding — and a handful of delinquent loans — have led to closer scrutiny from lenders.

“People want to see stronger financials, less leverage, a longer track record [from borrowers],” Clancy said. “People are cautious, but its still available.”
Still, Clancy said, many owners may be insulated this time around by long-term financing that will carry them through a recession.

To some extent, he added, the narrative of a looming recession “has got ahead of the reality.” But, he said, there’s a consensus that the unprecedented 10-year economic expansion is nearing its end.
“There’s one perspective that we’re in the eighth inning of the rally,” Clancy said. “But some people think we’re in the first inning of a recession where the first pitch really hasn’t been thrown yet.”

As of early September, 7.7 percent of the $3.9 billion CMBS loans for hospitality properties in New York were in some stage of delinquency, according to Trepp. By comparison, only around 2.6 percent of the $3.9 billion in hotel-backed CMBS loans in L.A. are in delinquency, and none of the $3.9 billion in South Florida are.

Strong tourism in New York has kept occupancy relatively high — it’s hovered above 85 percent since 2013. But for every month this year, those rates have been down over last year.
In May, the Miami-based Safe Harbor Equity launched a $100 million distressed debt fund and then doubled its target a month later after garnering strong interest during fundraising tours in Europe and Asia. Raphael Serrano, the firm’s managing director, said the fund — which will target all commercial assets, including hospitality and retail properties — is focusing on South Florida but will also look to other major markets, including New York, Texas and California.

The Edition in Times Square
Safe Harbor’s goal is “to be well-positioned for the oncoming economic headwinds that are being forecasted,” Serrano said in May.

A recession may not even be the most worrying challenge ahead for hotel builders in New York.
Construction and labor costs are already contributing to struggles for developers in the Big Apple, Miami, California and elsewhere.
In New York, rising costs are baked in balance sheets for the next seven years. That’s because in 2015, the Hotel Association of New York City — which represents hotel owners — extended a 2012 deal to increase wages for bar and restaurant workers through 2026.
HANYC President and CEO Vijay Dandapani said that while labor costs are a concern, an even bigger issue in New York is property taxes.
“Real property taxes are a real bite,” Dandapani said. “On a macro level, we’ve been working on this for years with the Department of Finance.”
High costs become that much more problematic when RevPAR takes a hit.
“I think the scariest thing is that costs right now are for the first time in years going up faster than RevPAR, particularly for labor,” said Butler, speaking about the national landscape but also noting that it’s a concern in New York.
He said it’s crucial for hotel investors to be capitalized going into a downturn. “The best thing you can do to prepare for a downturn is make sure you have ample equity and funding,” Butler said. “The hotel industry is cyclical — they’re going to be back, but if you can’t get through the downturn, you could lose your property.”
He noted that when consumer and corporate clients start to cut back on expenses, the luxury hotel industry tends to cut room rates. That, he said, creates a “suicidal” downward spiral. Hotel owners would be wise to hold steady on pricing in the event of a slowdown, he said.
Larry Wolfe — vice chairman and co-head of the Lodging Capital Markets group at Newmark Knight Frank — also noted that owners usually cut their room rates if occupancy dips.
“In New York there seems to be infinite demand for cheap rooms, so occupancy stays up but rates don’t hold and [owners] tend to cave,” Wolfe said. “So if declines in the bottom line accelerate, inevitably there will be more situations that become somewhat distressed.”
Black swans
The hotel market has been underperforming for a while now.
In 2017 and 2018, national RevPAR growth was the weakest it’s been since the recession — at around 2.9 percent annually, according to STR.
RobertDouglas’ Hercher cautioned that the recent declines in fundamentals are more a function of “oversupply” and “post-peak pricing” than a recession.
“What we haven’t seen in a way that I would be willing to say demonstrates — or is evidence of — a recession,” said Hercher, who represented KHP Capital Partners in its $67.6 million sale of the 205-key hotel at 70 Park Avenue in 2016. “Declines in [room rates] and occupancy that appear to be a function of a drop in demand instead of new supply or unwillingness to pay a higher [rate].”
The prevailing view seems to be that when the next recession hits, it will be less severe than the last one. But Butler noted that there are always unknowns.
“I am not pessimistic, I am optimistic,” he said. “But over the years, I’ve been through some cycles where there is an event that isn’t quite as big as a black swan, and we never see it no matter how hard we look. We never see it.”

David Goldsmith

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Bryant Park Hotel being marketed as office space
122K sq ft property seeking rents between $85 and $125 per sf

The coronavirus pandemic is forcing hotel owners to consider new strategies for their properties — including turning them into offices.
The landmarked Bryant Park Hotel at 40 West 40 Street is the latest property to make the switch, the New York Post reported. The owners, Philip Pilevsky, Raymond Gindi and Joseph Chehebar, have tapped Philips International to market the entire 25-story building as “boutique” office space.

The building’s 122,000 square feet will be available in blocks ranging from 1,900 to 7,535 square feet. Brokers told the Post that the owners are aiming for rents of $85 to $125 per square foot.

“They want to see what they can get,” one source said. “As bad as the hotel market’s going to be after the pandemic, there’s surprising optimism about offices.”
Recent big leases by firms like TikTok, AIG and Raymond James have recently brought some life back to the Midtown office leasing market. “Of course, the Bryant Park’s smaller floors make it a different kind of animal,” the source noted.

The Omni Berkshire Place hotel at 21 East 52nd Street is also reportedly likely to be converted to office space. Other hotels are currently being used to house the homeless.
The current owners acquired the property for $150 million in 1998. The 128-key hotel is also home to a ground-floor restaurant, Koi, and an underground lounge, Celon.

David Goldsmith

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Half empty or half full? Hotel occupancy rate nears 50%
Rate still remains over 40% below last year’s totals for NY, LA, Chicago and Miami

Hotels are continuing their comeback, ever so slowly.
The occupancy rate across the U.S. hit 48.9 percent for the week ending Aug. 1, according to hotel data tracker STR. The rate has increased for 15 of the last 16 weeks; the streak was interrupted in the week ending July 4 because of a surge in coronavirus cases.

Occupancy rates do not take into account hotels that are closed.
In the Los Angeles/Long Beach market, the rate was just under 50 percent, while New York continued to struggle, with an occupancy rate of just 36 percent. Chicago recorded an occupancy rate of 38 percent and Miami just 33 percent.

All four cities remained more than 40 percent below their occupancy rates from the same time last year. And of those four, only New York’s $59.40 revenue per available room exceeded the national average of $45.97. Miami and Chicago RevPars were each around $33.

In the last month, overall hotel occupancy has increased just three percentage points.
Those numbers may not improve significantly any time soon. Last week, Dr. Deborah Birx, the White House coronavirus task force coordinator, advised that the U.S. was entering a “new phase” of the virus, one in which infections were “extraordinarily widespread” in both rural and urban communities.

Summer has led to an uptick in hotel bookings, but STR’s Jan Freitag said, “what happens after Labor Day, when people go back to school, if they go back, and leisure numbers decrease? We expect corporate group demand to stay very low.”
Hotels in metro areas remain the hardest hit. Among the top 25 markets, only Norfolk/Virginia Beach, Virginia, cracked 60 percent occupancy. And just three other markets — Detroit, San Diego and Philadelphia-New Jersey — exceeded 50 percent.

Oahu Island in Hawaii and New Orleans registered the lowest occupancy rates at 21.4 percent and 29.7 percent, respectively.
Freitag added that in the remaining days before the school year begins, he expects travelers may also drive out to wide-open spaces — in addition beaches — in states like Idaho, Montana, South Dakota and Wyoming.

David Goldsmith

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Nearly $1.5B in NYC hotel loans are unpaid
That’s pushed the greater New York area’s CMBS delinquency rate to 39%

New York’s hotel industry has a whole lot of debt and none of it is getting paid.
There are $1.47 billion worth of commercial mortgage-backed securities loans on hotels that have gone unpaid, Crain’s reported. That’s the largest wave of hotel delinquencies in the country. It’s pushed the greater New York market’s delinquency rate to nearly 39 percent, compared to the usual 1 percent rate nationally.

One in four U.S. hotels is at risk of foreclosure. Many hospitality companies have laid off staff and some have gone bankrupt.

“With record low travel demand, thousands of hotels can’t afford to pay their commercial mortgages and are facing foreclosure, with the harsh reality of having to close their doors permanently,” said Chip Rogers, president of the American Hotel and Lodging Association. The association is asking Washington for an industry bailout.

After months of sitting empty, hotels have only recently returned to some sense of normalcy. With overall occupancy rising for 17 of the last 18 weeks, the rate has finally hit the 50 percent mark for the first time since mid-March.

Still, in New York City, occupancy stands at 41 percent, a 54 percent decline from the same time last year. That could be in part a result of the state’s 14-day quarantine requirement for travelers from states where Covid-19 infections exceed 10 percent.

David Goldsmith

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Hilton Times Square to close permanently
Hotel struggled to make mortgage payments even before the pandemic

The Hilton hotel in Times Square is closing its doors permanently.
The 478-room hotel at 234 West 42nd Street disclosed its plans to permanently shutter in a filing with the New York State Department of Labor Wednesday.

The hotel’s 200 employees, some of whom had been furloughed since March, will be permanently laid off, according to the notice.

The hotel’s owner, California-based hospitality REIT Sunstone Hotel Investors, did not immediately respond to a request for comment.

Sunstone hasn’t made payments on its $77.2 million mortgage since April, according to the company’s most recent quarterly filing with the U.S. Securities and Exchange Commission from August. Sunstone also hasn’t made rent payments on its ground lease since March, and said it’s considering a “negotiated transfer” of the hotel to either its lender or the landlords.

The closure is just the latest example of distress pummeling the hotel industry since the coronavirus nearly shut down travel and tourism to the city in March.
The Times Square Hilton, however, had been struggling to make payments on its mortgage before the pandemic.

David Goldsmith

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New York hotels starting to trade at discounts.
Royalton, Garment District hotels sell at discounts
Each owner sold at a loss to what they originally paid

Some investors are seizing on the opportunity to snatch up hotels at significant discounts.
Ashford Hospitality Trust Inc. has sold its 310-room hotel at 60 West 37th Street in the Garment District to Magna Hospitality Group for $115 million, according to property records. That’s a 41 percent discount to the $195 million the real estate investment trust paid for the Embassy Suites hotel 18 months ago.

Similarly, hotel operator Highgate and real estate investment firm Rockpoint Group sold the storied Royalton Hotel for $40.8 million — a roughly 25 percent discount to the $55 million the partners paid for the property at 44 West 44th Street in 2017. MCR — which also owns the TWA Hotel at John F. Kennedy airport and the 150-room Courtyard by Marriott in downtown Newark among others in the area — is the buyer.

Ashford, Magna Hospitality, MCR, Highgate and Rockpoint did not reply to requests for comment.

For Ashford, its purchase of the Embassy Suites hotel was intended to be the Dallas-based firm’s entrée into New York real estate. But after the coronavirus ground the city’s travel economy to a halt, the hotel buckled under the weight of its debt. Ashford became two months delinquent on the CMBS loan behind the property after the debt was transferred to special servicing in May, according to the data firm Trepp.

In the first quarter of this year, the hotel had a net operating loss of $1.7 million compared to operating income of $7.35 million in the full year of 2019.
Adrian de Gortari, whose LinkedIn page lists him as vice president of revenue management at Rhode Island-based Magna Hospitality, signed the transaction documents for the buyer. In his profile, de Gortari lists himself as a former professor of revenue management at New York University and consultant for Hilton Worldwide. On its website, Magna Hospitality describes itself as an opportunistic hotel real estate investment firm.

For the Royalton, it’s not the first time the storied hotel has traded at a discount. Highgate and Rockpoint had purchased the property from Felcor Lodging, a Texas-based firm that pumped millions of dollars of renovations into the hotel, for $55 million in 2017. Felcor paid $80 million in 2011 to buy the property from Morgans Hotel Group.

Before that, it was owned by hotelier Ian Schrager, who snapped up the property in 1988 and invested in making it a dining destination.
At that point, the hotel was a hot spot for business lunches and meetings. In the late 1990s, Stephen Green met there with Marc Holliday to plan out the future of his firm, SL Green Realty.

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Courtyard by Marriott in Herald Square to close permanently
The hotel’s parent company blamed Covid-related financial losses for the closure

The wave of closures hitting New York City hotels has claimed another victim: Herald Square’s Courtyard by Marriott.
The hotel’s owner recently filed a notice with the New York State Department of Labor detailing its plan to lay off 59 employees, who have been furloughed since March 21. The reason for layoffs is permanent closure of the 167-room hotel, located at 8 Herald Square, due to “unforeseeable business circumstances prompted by Covid-19.” Layoffs will occur between Sept. 24 and Oct. 8, according to the filing.

The hotel’s owner, Courtyard Management Corporation, and the hotel’s general manager, Alpha Midiaou Barry, could not be immediately reached for comment Monday.

The hotel’s demise is part of the ongoing trend in the pandemic-stricken hospitality industry. Nearly two dozen hotels — including six operated by Marriott — filed similar notices with the Department of Labor in June. More than $1 billion in commercial mortgage-backed securities loans on hotels have gone unpaid. And occupancy rates in New York City remain lower than the national average, putting pressure on hospitality firms’ bottom lines.

Most recently, the 478-room Times Square Hilton also announced its permanent closure and laid off 200 employees.

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Hotel industry is in trouble and more lenders want out
Half of CMBS loans seeking forbearance tied to hotels, totaling $23B

With about $23 billion of hotel-related CMBS loans in forbearance, more lenders are looking to offload those mortgages. (iStock)
As hotels across the U.S. continue to suffer — average occupancy is just under 50 percent — an increasing number of lenders are scrambling to sell their mortgages.
Mack Real Estate Credit Strategies has hired Cushman & Wakefield to sell mortgages totalling $500 million tied to the Times Square Hotel in Manhattan and two St. Regis hotels in Washington, D.C. and Miami, according to Business Insider.

In July, Wells Fargo hired Newmark Knight Frank to sell a $56 million senior mortgage against a controlling interest in Marriott’s Fairfield Inn & Suites on West 33rd Street in Manhattan.
And Barings, an investment-management arm of the life insurance company MassMutual, also hired Newmark to sell a $52 million loan tied to a Courtyard by Marriott hotel on West 37th Street.

The moves come as nearly half of all CMBS loans in forbearance are tied to hotels. An increasing number of hotels face foreclosure, with occupancy rates and tourism still low amid Covid-related shutdowns.
In New York City hotels, the average occupancy rate stood at 37 percent, according to the latest report from hospitality industry tracker STR. That was a 58 percent decline from the same period last year.

Of all the CMBS loans whose borrowers are requesting forbearance, about 44 percent are tied to hotels, totaling $23 billion, according to S&P Global Ratings, more than any property type.
“There’s a little bit of reality setting in for hotel owners and lenders who were saying earlier in the crisis that things will get better,” Adam Etra, who co-heads Newmark’s lodging group, told Business Insider. “Things didn’t get better, they’re actually worse.”

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Prodigy Network’s AKA Wall Street hotel closes permanently
Closure is latest step in slow unraveling of troubled crowdfunding form

AKA Wall Street, an extended-stay hotel once marketed by crowdfunding platform Prodigy Network as a promising investment opportunity, has closed its doors for good.
The hotel at 84 William Street shut on Aug. 24, according to a notice filed this week with the Department of Labor. A total of 31 employees are affected.
The closure marks another step in the slow unraveling of Prodigy, which has been marred by months of financial problems and lawsuits from investors. The firm recently closed its co-working brand, The Assemblage, with two locations selling at a loss. A month earlier, Prodigy founder Rodrigo Niño, died at the age of 50. No replacement has been appointed.
Representatives for the company could not be reached. Larry Davis of Shorewood Real Estate Group, Prodigy’s development partner, did not respond to a request for comment.

AKA Wall Street is one of many hotels to shut down in the past three months, with others including the Hilton in Times Square and the Omni Berkshire Place hotel in Midtown. But while the hotel’s fate may have been sealed by the pandemic, its financial problems date back much earlier. In February, Prodigy wrote to investors in the building asking for $40 million to keep it afloat, warning that they risked losing their investments if the money wasn’t raised. A similar letter was sent out in March, asking for $30 million to save another Prodigy property at 85 West Broadway, which also operated as an AKA-branded hotel.

Representatives for Korman Communities, which operates the AKA hotels, did not respond to requests for comment.
Niño, a former luxury real estate broker who once marketed units at Trump Soho, launched Prodigy as a crowdfunding firm in 2013, raising some $690 million from investors around the world to fund commercial real estate developments in New York, Chicago and his native Colombia.
The latest closure will only create more uncertainty for investors, who have been largely shut out by Prodigy since the company stopped paying distributions across its portfolio last year, blaming underperformance.

Communication is further complicated by the fact that many investors are based overseas and Prodigy appears to be barely operating, leaving emails and phone calls unanswered.

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Iconic, Near Century-Old Roosevelt Hotel Will Close At The End Of October

The elegant Roosevelt Hotel in Midtown will close this month because of lagging business caused by the COVID-19 pandemic, according to reports.
The 96-year-old hotel, a throwback inn that covers an entire city block and is complete with old-school chandeliers, enormous vases, and grand lobby, will reportedly close at the end of October after struggling financially to keep its doors open during the pandemic.
"Due to the current, unprecedented environment and the continued uncertain impact from COVID-19, the owners of The Roosevelt Hotel have made the difficult decision to close the hotel and the associates were notified this week," the spokesperson wrote in a statement to WABC-TV. "The iconic hotel, along with most of New York City, has experienced very low demand and as a result the hotel will cease operations before the end of the year. There are currently no plans for the building beyond the scheduled closing."
Workers were informed about the closure to the city-block-sized hotel on social media, according to NY1. The Hotel Trades Council, the union representing workers, said that the Roosevelt's owners violated the 60-day notice informing employees that they plan to close. A spokesperson for the hotel did not immediately respond to inquiries on why it did not inform staffers of the closure 60 days before it is set to close.

Gothamist's Editorial Director Jen Carlson toured the hotel five years ago, capturing the grandeur of the hotel:
"You don't need to be a guest to enjoy the lobby and its surrounding areas, which are not only the centerpiece of the place, but also the best refuge when you have time to kill in Midtown. In there you'll find a bustling scene (tourists, sure), with a bar overlooking it... but go even higher, to the mezzanine level, to escape it all—there you'll find one of the most perfect spots in all of Midtown. You can bring a book, or even a drink from the bar up there, where you'll find tables for two (paired with old sunken, comfy chairs) overlooking the lobby. In the 30 or so hours I spent at the hotel, I rarely saw anyone utilizing this space."
The 16-story structure named after President Theodore Roosevelt (who died in 1919) is located on West 45th Street near Madison Avenue. It's also known for its subterranean tunnel that connected to nearby Grand Central Terminal, offering a link to guests heading out for a night on the town. As Carlson wrote in a separate article in 2015, the tunnel has since been sealed, but the pathway to where it led remained intact.
"It looks almost like an old subway entrance, and our guide told us it used to lead to a tunnel, which is now closed off. Through the rolling metal gate (which was closed when I was originally taken there) you can see a set of steps, along with some signage for Sarar's, a clothing store located on the same block as the hotel."
The hotel has also been immortalized on film, appearing in movies such as "Wall Street," "Malcolm X," and "Men In Black 3."

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What Happens When a Massive Wave of Hotels Default?

The hotel industry is struggling under months of cratered occupancy and revenue. But there may be a way to avoid foreclosure with the bank — as long as your hotel was doing fine before the pandemic.

An enormously large number of U.S. hotel owners are at risk of defaulting on their mortgages, but experts say the banks holding those loans aren’t likely to usher in an era of mass hotel foreclosures across the country.
Hotels — at a nearly 24 percent delinquency rate at the end of the summer — are the biggest source of delinquent loans for commercial mortgage-backed securities, a group of mortgages pooled as one that hotel developers use to build new projects, reports data firm Trepp. Just over 1 percent of hotel loans were in default at the end of 2019.
More than $22 billion in hotel loans are in special servicing, a type of commercial mortgage-backed purgatory between default and foreclosure, according to JLL.
Not every hotel owner in the U.S. relied on commercial loans to build their property, but 50 percent of U.S. hotel owners claim they are in danger of foreclosure by their lenders due to the pandemic, according to an American Hotel & Lodging Association report.
There are fears, six months into the pandemic, banks are going to end the flexible payment terms and forbearance offered in March and April. Commercial mortgage-backed loans are harder to get modifications due to their pooled nature compared to a traditional bank loan.
But real estate attorneys and even lenders still question how many hotel foreclosures will actually materialize simply due to the high volume that would occur if banks or commercial loan servicers actually played hardball.
“I think a lot of the lenders learned some very good lessons in the last downturn,” said Clifford Risman, a Dallas-based real estate attorney at Foley & Lardner. “If the lender could foreclose and change a flag or management company and operate better or differently, yeah they would. But this is a problem that changing a flag and management company isn’t going to fix.”
When the Usual Tools Don’t Work
A global pandemic is an unprecedented problem for the hotel industry, and the usual demand-generating measures are unlikely to resurrect cratered occupancy and revenue. That is why many hoteliers haven’t offered deeply discounted rates, as experts caution a loss of pricing power will cause the industry to take even longer to recover.
Banks recognize this and note that revenue and occupancy are down so significantly across the industry that it would take far more than a new brand flag to recoup losses and meet debt service obligations, Risman said.
“I don’t think demand will drive this. Occupancy has been so low that a double-digit increase isn’t going to change whether or not someone can pay their debt service. That’s how bad it was,” he added. “I think a lot of the lenders have no interest in taking over a title.”
Foreclosure is often a last resort and not necessarily inevitable, even in a year shaping up to be the worst year financially for hotels.
“The banks at the end of the day don’t want to take these assets,” said Jeff Diener, a partner at DLA Piper. “They just want to get paid their interest and principal, month after month.”
But this doesn’t mean lenders are always looking to hold onto hotel mortgages, either.
“I don’t necessarily see foreclosures,” said ACRES Capital CEO Mark Fogel. “I see people buying notes at discounts and working something out with borrowers until demand comes back.”

ACRES Capital is a commercial real estate lender that offers bridge and construction loans to hotel developers in a variety of market segments. Rather than outright foreclosure, Fogel sees a wave of banks selling hotel notes to investors at a discounted price.
“If I buy at 70 cents on dollar, I have a discounted basis, can go back to the borrower, and work things out with a big cushion,” Fogel said. “Lenders and borrowers are generally saying we just have to live and fight to see another day.”
That discount gives the new lender more leeway to restructure debt servicing obligations to something that could work for the owner of a hotel with cratered occupancy and still get a decent return on investment. But the new deal could also come with new capital investment requirements or higher interest rates.
“Nothing is going to come for free,” Diener said.
Not a Total Foreclosure Avoidance
Foreclosures aren’t entirely off the table, despite the optimism for continued bank flexibility and alternative lending arrangements.
“Are we going to see mass foreclosures? It’s hard to give a yes or no answer to that, but I think it’s probably somewhere on the spectrum. There will be foreclosures,” said Meagen Leary, a Duane Morris partner whose clients include institutional lenders and commercial loan servicers.
Hotels less likely to make it out of the pandemic are those that were already struggling before coronavirus hit the U.S. Those include hotels with higher leverage or in struggling markets like Texas, where the oil business had declined in recent years.
But hotel owners in stronger markets and with generally good business before the pandemic may find better luck with their lenders, even commercial loan servicers. Further, just because a hotel loan goes into receivership following a default doesn’t always mean foreclosure is inevitable.
“Some hotels are performing well, and borrowers with good balance sheets and who are willing to have more skin in the game with longer-term work … Those have a stronger chance of being worked out,” Leary said.
More skin in the game includes cash management arrangements where a lender holds all the cash or excess cashflow to have added security, increased guarantee protections, and other cooperation covenants, she added.
But that is likely not enough to bail out certain hotels, especially those tied to conventions or heavily reliant on business travel to urban markets.
Wells Fargo in August sued Thor Equities for missing monthly loan payments since April on a $333 million mortgage at the 1,639-room Palmer House Hilton, Chicago’s second-largest hotel. The mortgage matured in June and has yet to be fully paid off, the foreclosure suit alleges.
“The big loans are on these 500-room or larger hotels in urban areas that have huge levels of operating costs, even if they’re shut down,” Fogel said. “There’s going to be an opportunistic play for someone willing to carry those hotels for the next year or two.”

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Magna Hospitality emerges as New York’s hotel vulture
Rhode Island-based firm is snapping up hundreds of rooms at deep discounts

A New England private investment firm is quickly becoming the biggest vulture feasting on New York City’s distressed hotels.
Magna Hospitality Group is acquiring two Manhattan hotels with more than 460 rooms between them, as the owners walk away from the struggling properties, sources familiar with the transactions told The Real Deal.

Those deals follow Magna’s recent acquisition of the 310-room Embassy Suites at 60 West 37th Street for $115 million — a 41 percent discount from what seller Ashford Hospitality Trust paid for the property 18 months earlier.
In just a few weeks, Magna has added 800 rooms to its portfolio at a time when the hospitality sector is experiencing what many believe is its worst crisis ever.

A representative for Magna, headquartered in Rhode Island, declined to comment.
In the first deal, Magna is buying a $56 million loan on the 239-room Fairfield Inn & Suites at 325 West 33rd Street from lender Wells Fargo, sources said. The deal is being structured as a deed-in-lieu-of-foreclosure, where the owner, a subsidiary of the Hawaii-based investor Shidler Group, is handing back the keys in exchange for being able to walk away from the debt.
In the second deal, Magna is buying a $52 million loan on the 224-room Courtyard by Marriott at 307 West 37th Street from Barings, an investment-management arm of the life insurance company MassMutual. The transaction is structured similarly, according to sources, with borrower Watermark Capital handing over the deed.

Pricing details of both deals weren’t immediately available, but sources said Magna is buying the properties at significant discounts. In both transactions, the sellers are providing Magna with big acquisition loans. Newmark Knight Frank marketed both loans.
Magna is emerging as one of the most active contrarian investors in New York hotels, which were decimated by the pandemic and face an uncertain road to recovery.
The company, founded in 1998 by a trio of former executives from Grand Heritage Hotels, gained a toehold in New York in 2006 when it opened the 125-room Holiday Inn Express at 15 West 45th Street. Soon after, it opened a Holiday Inn Express in Park Slope and later teamed up with prolific hotel developer Sam Chang to convert a former office building at 373 Fifth Avenue into a 70-room boutique hotel.

According to its website, Magna owns or operates more than 20 hotels with over 4,500 rooms.
The company made well-timed profits on some of its early investments by selling properties in 2014 just as the hotel market peaked. A wave of new hotels flooded the city with supply that began a years-long period of declining per-room revenue.
“They bet big early last cycle and killed it, and they feel like this is an even bigger opportunity because there is more distress,” explained one hotel expert who is familiar with Magna’s strategy but not connected to do the deals.

There is one caveat: The lenders selling Magna the distressed mortgages on the properties are providing Magna with big loans to finance its acquisitions.
“They are buying these deals with a lot of leverage, so you could argue that they are lottery tickets,” the expert said.
Many New York City hotels have shuttered since the pandemic shut the spigot on travel. But despite the buildup of distressed hotels that experts believe is bubbling under the surface, few properties have actually traded hands to give buyers and sellers an indication of how to value them.

Many hotels that have had their securitized loans sent to special servicing recently received new appraisals. On average, they are coming in 29 percent lower than their pre-pandemic figures, according to Trepp.
While appraisals don’t always match up with market pricing, they serve as a benchmark for investors desperate for information.
Highgate Hotels recently struck an agreement to buy a portfolio of 197 properties from Colony Capital for $2.8 billion. Investors, though, have had trouble using the deal as a benchmark. Highgate is putting just $67.5 million into the multi-billion-dollar deal and assuming Colony’s debt. Experts said valuing the properties is difficult without knowing the terms, if any, that Highgate negotiated to modify that large debt.

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Poor hospitality: Hotel owners in big cities hit major tipping point
Hotel closures, layoffs and debt struggles in leading markets signal more bad news to come

All of the lights in the Hilton Times Square have been pitch black for weeks — one of several ominous signs for hotel owners in New York and other large cities around the country.
The owner of the 478-room property, just blocks away from Broadway and Bryant Park, disclosed plans to the state’s Labor Department last month to permanently shut its doors and lay off 200 employees.

The real estate investment trust Sunstone Hotel Investors had been struggling to make payments on a $77 million mortgage even before March, and the 44-story building became one of several name-brand hotels to permanently close this fall. The Hilton Times Square was soon followed by the Courtyard by Marriott in Herald Square and the Roosevelt Hotel on East 45th Street, which shuttered after nearly a century of business.
On the other side of the country, the Luxe Rodeo Drive Hotel in Beverly Hills also closed for good, after having embarked on a full renovation just before Covid hit. Owner Luxe Hotels told the Los Angeles Times it’s now considering “alternative options” for the high-end hotel.

Seven months into a pandemic that has hit the hospitality and retail sectors the hardest, many hotel owners around the U.S. are at a crossroads, despite an uptick in occupancy after most city and state shutdown orders were lifted. Some of the more highly leveraged owners are now deciding between repurposing their properties, selling at deep discounts, throwing the keys back to their lenders or buying themselves more time if they can afford to.
But forbearance agreements are quickly expiring, and temporary layoffs are becoming permanent. Without a federal bailout, an estimated 38,000 U.S. hotels could close permanently, while another 28,000 are at risk of being foreclosed on, according to the American Hotel & Lodging Association.

At the same time, from California to South Florida, hotel owners face growing threats from natural disasters, including fires, storms and flooding. One Napa Valley resort reportedly suffered extensive damage from California’s wildfires last month.
After a tumultuous 12 months, average hotel occupancy nationwide was at the halfway mark in September, down about 30 percent year over year, according to preliminary monthly data from hotel research firm STR. Average revenue per available room in New York, meanwhile, tumbled about 70 percent year-over-year to $53 a night from $182 in the same period. In California, RevPAR fell by nearly half to $71. In Florida, it dropped by about 30 percent to $46.

Suzanne Amaducci-Adams, a partner at the Miami-based commercial law firm Bilzin Sumberg, said many hotel owners have become paralyzed by the potential for new shutdown orders as Covid starts to resurge in major markets.
“I think people just don’t know what to do at this point,” said Amaducci-Adams, who runs her firm’s real estate practice. “Borrowers have been using their savings, whatever available cash they have on hand, and now that money has pretty much run out. Hotels are holding their breath.”
Still, distress always creates new opportunities, and there are plenty of buyers in the market, including Starwood Capital Group co-founder Barry Sternlicht and the British billionaire brothers David and Simon Reuben of Reuben Brothers.

Insiders say a number of loan sales and preferred equity deals have already happened. But when it comes to outright property sales, the asking price and the offers are still far apart in many cases, and time is running out for many borrowers.
“Any forbearance the lenders have previously offered is starting to end, and they’re very reluctant to do anything further,” said Jake Wurzak, whose Wurzak Hotel Group owns and operates hotels in several U.S. markets.
As the clock ticks…
In the early months of the pandemic, many borrowers worked out special arrangements with their lenders, in some cases burning through their reserves to fund interest payments.

But a growing number of owners have stopped making payments altogether and are walking away from their hotel properties.
“As owners start to realize how long this is, they’re going to have to reevaluate whether it makes business sense to hang on,” said Amaducci-Adams.
Ashford Hospitality Trust — which reportedly received and returned $38 million in Payment Protection Plan funding in the first few months of the pandemic — sold its newly purchased Embassy Suites near Times Square to Magna Hospitality Group for a 41 percent discount after missing several mortgage payments.

The hotel REIT announced that it signed forbearance agreements for 34 hotels, totaling about $1.2 billion in debt, which will allow Ashford to defer interest on its loans for another six months.
Meanwhile, a $768 million loan backing Colony Capital’s Tharaldson hotel portfolio tops the list of commercial mortgage-backed securities deals that are more than 90 days delinquent, according to data from Trepp. The second-biggest delinquent CMBS deal is a $329 million loan backing Thor Equities’ Palmer House Hilton in Chicago, which went into foreclosure in August.

CMBS loans, which are more difficult to renegotiate than most other loans due to obligations borrowers have with their bondholders, often become the first to go under.
“The original reaction was to kick the can,” said Douglas Hercher, principal and managing director of the New York-based advisory firm RobertDouglas. “Lenders and borrowers are now looking for a solution that will carry them for the next 12 months.”
But this pandemic is unlike previous economic crises.

Demand for international travel may not return until at least 2024, according to one industry study. Domestic travel, especially business travel, is expected to remain low, and now that school is back in session, many families are traveling less by car.
As a result of the plunge in demand, many hotels are extending their temporary layoffs beyond six months and eliminating positions. Walt Disney recently announced that it plans to cut 28,000 jobs, mostly at its California and Florida theme parks.
“Even in the depths of post-9/11, you never had occupancy go to 10 or 20 percent. You never had hotels closing,” Hercher noted.

Lender limits
At the same time, most lenders don’t want to take over a hotel if it means running it in a coronavirus economy.
Attorney Luis Flores, a partner at Miami-based Saul Ewing Arnstein & Lehr, said the majority of banks and other debt providers didn’t issue their loans “to become hotel operators.”
But many hotel owners that can’t climb out of the hole are now asking their lenders to take a discounted payment on their debt while forgoing whatever equity they had left, accelerating transfers of ownership, he said.

“The aggressive owners and developers are being smart and saying … ‘We want to exit the asset as soon as possible,’” Flores noted.
He and others in the business say bank financing for new hotel acquisitions has become virtually nonexistent, limiting the pool of buyers to private equity firms, special purpose funds and family offices that will pay cash.
A growing number of banks and other lenders are also looking to liquidate their loans.
Frank Nardozza, chair and CEO of REH Capital Partners, an investment advisory firm based in Fort Lauderdale, said some nonbank lenders are considering selling their loans for deep discounts — ranging from 20 percent to 60 percent.

Not all hotels are on the chopping block, though.
Properties that rely on large conventions and meetings and that require air travel to get there will likely take the longest to recover. On the flip side, drive-to destinations, including many beachfront markets throughout Florida and in other locations with access to beaches, mountains or parks, experienced a rise in occupancy over the summer.

“People don’t want to get on planes. The lead time for booking those 2,000- [to] 10,000-person conventions is six months or more,” Hercher said, referring to markets such as Las Vegas, Orlando and New York City.
“The operating costs for those hotels is really high,” he added.
Who’s buying?
Despite the growing number of challenges facing hotel owners, some investors are still ready to pounce on new hotel deals.
CBRE hotel broker Paul Weimer said he’s being “overloaded” with calls from potential buyers, many of whom have ideas for repurposing existing hotels into multifamily or other uses. “Everybody and their brother wants to buy a discounted hotel,” he maintained.

Sternlicht, for one, has been vocal about his hunt for discounted hotels. As of late July, a Starwood fund was looking to raise billions to snap up distressed properties, including hotels that have shuttered due to the pandemic.
Reuben Brothers last month acquired a 25 percent stake in Jeffrey Soffer’s JW Marriott Miami Turnberry Resort & Spa in South Florida’s wealthy Aventura enclave, and plans to partner with Soffer on other assets. Since April, Soffer’s Fontainebleau Development has been seeking modifications to a $975 million CMBS loan backing its 1,500-room Fontainebleau Miami Beach — Miami-Dade County’s largest hotel, which relies heavily on group bookings.

CGI Merchant Group, meanwhile, launched a $500 million fund to invest in struggling hotels in North America and the Caribbean, properties that would be branded under the Hilton flag. Miami-based Safe Harbor Equity, led by Rafael Serrano, is raising $500 million as well to invest in hotels in major metropolitan areas, including New York, Los Angeles, Chicago and Miami.
Serrano said his fund will spend between $25 million and $50 million to acquire the debt on distressed hotel deals. “We would like to work with the borrowers to position ourselves as rescue capital,” he noted.

Even some operators that already own struggling hotels are in the market for discounted assets. Wurzak, whose Philadelphia-based firm has majority stakes in 12 properties around the country, said he has his eyes on full-service hotels in markets with high barriers to entry, such as New York and Miami.
“This amount of distress will probably create the greatest investment opportunities I’m going to see in my lifetime,” he said.
Wurzak said he’s looking to inject $200 million into more than $1 billion worth of hotel properties over the next three years. Though his hotels are “certainly in some level of distress,” Wurzak said his firm can raise capital as needed and is well-positioned to make it to the other side of the pandemic.

“We’re not a hedge fund sitting in front of a monitor in New York,” he noted. “We operate hotels.”
Though a number of U.S. hotels are now up for sale, many buyers and sellers haven’t been able to agree on a price, according to industry brokers.
Susan Gale, a hotel broker with One Sotheby’s International Realty in Miami Beach, said some of her clients are “under pressure” and willing to discount up to 20 percent.
Gale said the situation will be even more dire come November, as the hotels that have been waiting to reopen burn through more cash to cover expenses that include brand fees, maintenance and accounting.

REH Capital’s Nardozza said a high-end hotel could be incurring $1 million in annual operating costs even if it’s shut down.
Repurposing rooms
Some owners are considering alternative uses for their properties, including converting their hotel rooms to office space, student housing and homeless shelters, the latter of which can collect rent from city governments and nonprofits.
The 600-plus-room InterContinental Times Square in New York, which housed doctors and nurses this spring, is now offering rooms as office space on a suite-by-suite basis.

Developer Jimmy Tate, who purchased distressed debt in the last recession, said owners have to do what they can to fill rooms. In addition to running marketing campaigns for staycations at his Bahia Mar Fort Lauderdale Beach, Tate is setting up some of the resort’s rooms as offices.
“It’s different, but it’s getting people to come to the hotel,” he said, noting that his plans to redevelop the waterfront Fort Lauderdale property are temporarily on hold.
While predictions for a full recovery range from 2022 to 2025, no one really knows when the country’s biggest hotel markets will return to pre-pandemic levels.

For now, many of the hotels that remain open have slashed their rates, resulting in a pricing war that could slow down the industry’s recovery in the long run. The average daily rate in the U.S. was under $100 a night in September, a 26 percent drop year-over-year, according to STR, with one of the steepest declines occurring in New York City at nearly 50 percent.
Some industry players warned that the markets that had been struggling before the pandemic, whether there was an oversupply or the properties were overleveraged, will experience the greatest challenges.

“There are certain urban markets that are just going to recover more slowly,” said Hercher of RobertDouglas, citing the Big Apple as a prime example.
“New York is going to be challenged for a while,” as the pandemic has imposed a “day of reckoning” for many hotel owners in the city, he argued.
“So many things people think of as quintessentially New York — great restaurants, Broadway, music venues — until you get that tourism engine really fired again, that’s just a big demand generator that’s not there,” Hercher noted.