US hotel loan defaults could rise on falling leisure stays, climbing costs By Reuters

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<p>By Matt Tracy</p>
<p>(Reuters) – U.S. hotel owners could see greater pressure on their ability to service the loans backing their properties, as a decline in leisure stays coupled with rising costs are expected to pinch their profits. </p>
<p>In the second quarter, many hotel owners reported rates of leisure stay anywhere between 25%-35% above 2019 levels. </p>
<p>But as the surge in travel after the pandemic wears off, demand is shifting away from pricey leisure stays and towards lower-rated group business travel, according to a Wednesday report from ratings agency Fitch.</p>
<p>Leisure travel will likely fall further in the event of an expected recession in the first half of 2024, the Fitch report noted.</p>
<p>“If there’s a recession, hospitality is the first-in and the first-out of any downward trend,” said Willy Walker, CEO of commercial real estate lender Walker &amp; Dunlop (NYSE:). </p>
<p>Several hotel owners defaulted on loans backing various hotels in 2020, when travel plummeted at the start of the coronavirus pandemic.</p>
<p>According to a Thursday Moody’s (NYSE:) report, nine of the 19 commercial mortgage-backed security (CMBS) loans that liquidated in the second quarter of 2023 were hotel loans that initially defaulted in 2020, selling at a loss after the borrowers failed to work out a solution to avoid default. </p>
<p>Among these were a loan backing the Marriott Buffalo Niagara, as well as one behind the Hilton Garden Inn in Ames, Iowa.</p>
<p>Rising labor, energy and insurance costs will further pinch the wallets of hotel owners, according to Fitch, adding to their risk in making interest payments.</p>
<p>The greatest cost burden for hotel owners stems from insurance rates, Fitch noted, especially for hotels in areas most exposed to climate chaos.</p>
<p>Perhaps the hardest-hit in this category are hotels along the coast of Florida. </p>
<p>“It would not be a surprise if every hotel owner on Miami Beach is facing not just an increase in hurricane, flood and wind storm insurance premiums, but at a multiple of 2-3x,” said Eric Goldberg, co-chair of the real estate law practice at Olshan Frome Wolosky. </p>
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