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(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.
In the second quarter, many hotel owners reported rates of leisure stay anywhere between 25%-35% above 2019 levels.
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.
Leisure travel will likely fall further in the event of an expected recession in the first half of 2024, the Fitch report noted.
“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 & Dunlop (NYSE:WD).
Several hotel owners defaulted on loans backing various hotels in 2020, when travel plummeted at the start of the coronavirus pandemic.
According to a Thursday Moody’s (NYSE:MCO) 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.
Among these were a loan backing the Marriott Buffalo Niagara, as well as one behind the Hilton Garden Inn in Ames, Iowa.
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.
The greatest cost burden for hotel owners stems from insurance rates, Fitch noted, especially for hotels in areas most exposed to climate chaos.
Perhaps the hardest-hit in this category are hotels along the coast of Florida.
“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.
