A Sudden Shock

The lodging sector has been one of the most heavily affected by the COVID-19 pandemic due to government travel restrictions, state mandated closures, and consumers' fear of travel. Revenue per available room (RevPAR) declines during the past seven months were likely the highest in U.S. lodging history. At the outset of the pandemic in April and May, RevPAR declined by 79.9% and 71.0%, respectively, compared to the same months in 2019, before settling at a level that was about 46%-52% below the prior year levels from July-October.

Yet the COVID-19 pandemic and its ensuing effects have not impacted all property types and locations to the same degree. Limited service and extended stay hotels have outperformed full-service hotels. Hotels in drive-to locations, suburban, and smaller markets have outperformed hotels in urban and airport markets. Further, hotels catering to leisure travelers have performed better than hotels targeted to corporate demand, and meeting and group demand, both of which have been curtailed as companies suspend travel and as meetings and conventions are postponed.

A Slow But Stagnating Recovery

Year-to-date through October 2020, U.S. RevPAR is down 46.8% versus the same period last year(i). As a point of comparison, during the 2009 recession, RevPAR declined 17%, and in 2001, RevPAR dropped 7% as a result of the 9/11 attacks. There are no events in the last 30 years that have impacted the sector to the same degree as this health crisis. Occupancy across the U.S. was 47%-48% from July-October 2020. As the number of COVID-19 virus cases has surged in recent weeks, occupancy has dropped in each of the first three weeks of November to the low 40% range, and fell to 36.2% in the week ended Nov. 28, 2020. Notably, the mid- to high-40% range is the level of occupancy that most hotels need in order to pay their expenses and begin to generate a profit.

Chart 1

The Effects On CMBS So Far

As of November 2020, the outstanding U.S. CMBS balance was approximately $603 billion, of which, roughly 15% (over $90 billion) was backed by lodging. In terms of composition, slightly more than half of the lodging loans (about 54%) are securitized in diverse conduit transactions, and about 46% are included in single asset/single borrower (SASB) deals. The overall delinquency rate (at least 30 days delinquent) for all U.S. CMBS loans was 7.3% as of November 2020. By property type, lodging had the highest delinquency rate at about 18.6%, compared to an average of only 2% between 2017-2019.

Also, as of November, roughly one quarter of lodging loans were in or seeking some form of forbearance, not including loans already classified as delinquent. With respect to forbearance, servicers have been granting some combination of debt service relief (three-six months), the ability to use reserves to pay debt service and expenses, waiver of reserve contributions, and waiver of furniture, fixture, and equipment reserve contributions. However, most hotels that were granted short term relief will likely need additional support as depressed occupancy and net cash flow levels continue to persist. It remains to be seen how servicers will respond to the expiration of the initial short-term relief periods that were granted.

The percentage of CMBS hotel loans in special servicing (which generally includes loans that are 60+ days delinquent or loans where the borrower has indicated hardship/inability to pay debt service) was 24.1% of lodging loans as of November 2020. New appraisals received thus far have generally indicated value declines ranging from 15%-30% of the original appraised value, which is generally in-line with the declines experienced during the 2009 recession.

Gauging The Prospects And Timing Of A Lodging Recovery

Given the magnitude of the RevPAR decline in 2020, which we expect will hover around -50.0%, we believe that the recovery will be slow and take several years. We do not think RevPAR will return to 2019 levels until 2023 (see "The U.S. Lodging Sector: A Slower Recovery Could Take Until 2023," published Nov. 5, 2020). Currently, leisure travel is driving occupancy in the U.S., but leisure demand on its own is not sufficient to drive a recovery. Corporate, and meeting and group demand will likely not begin to rebound until the second half of 2021 and the pace of its return will likely be slow and gradual. Certain hotels will recover faster than others, depending on price point, location, and market mix. We expect there will be hotel closures in urban markets that are oversupplied, a phenomenon we have already seen in New York and Chicago. There will also likely be some reduction in the profitable corporate segment as working from home becomes more common long term. Favorably, the supply pipeline should moderate as construction is halted due to lack of financing. Also, just as hotels are the first property type to falter because of their lack of long-term leases, they are also able to recover rapidly when demand rebounds.

A Spotlight On Urban Hotels And Severely Impacted Markets: New York, San Francisco, and Oahu

Year-to-date through October 2020, RevPAR for hotels in urban markets dropped by 62.2% compared to the same period last year. At the same time, RevPAR for hotels in the largest 25 U.S. lodging markets declined by 56.1%, compared to a more moderate 39.7% decline for the remaining, smaller U.S. markets. Larger urban hotel markets generally house a large proportion of full-service luxury, upper-upscale, and upscale hotels that have a greater reliance on higher priced corporate demand, meeting and group demand, as well as demand stemming from domestic and international air travel. These demand sources have been significantly limited since the onset of the pandemic.

Based on TSA checkpoint data, total traveler throughput in October and November averaged approximately 63%-64% below prior year levels. In addition, based on data from the National Travel and Tourism Office, international visitor arrivals to the U.S. dropped by 80% year-to-date through October 2020. This decline in airline passenger miles coupled with corporate restrictions on travel and the suspension of large group meetings, has resulted in an outsized impact on hotels in urban markets. Although leisure demand has remained stronger than other demand sources, the need for social distancing and fear of flying has pushed leisure travelers toward smaller markets and more remote drive-to locations, resulting in urban hotel occupancy levels of only 39.5% through October. This in turn, has led to longer term temporary hotel closures in these markets as hotels opt to remain shuttered since the low occupancy levels do not support profitable operations, particularly for more upscale hotels which have a higher expense load.

In October, Oahu, New York, and San Francisco had the largest RevPAR declines of the top 25 markets at -81.7%, -80.4%, and -78.5%, respectively. In fact, the RevPAR decline for all three markets was over 75.0% in each month from April to October. The overall CMBS lodging exposure and S&P Global Ratings' rated exposure within the New York City, Hawaii, and San Francisco markets is summarized in the table below.

Despite record demand, Manhattan's lodging market has struggled since 2010 due to the staggering increase in new hotel supply. Between 2009 and 2018, over 150 new hotels opened in Manhattan, increasing the guestroom count by about 28,000, or almost 40% (see "U.S. CMBS: Supply Gains Take A Bite Out Of Hotel Performance In The Big Apple," published Jan. 29, 2020). While most major markets prospered over the last five years, Manhattan's RevPAR declined in 2015-2017 and in 2019. The pandemic has further stressed the New York market. As of September 2020, over half of the hotel rooms in Manhattan remained temporarily shuttered, according to PwC's Manhattan Lodging Index for second-quarter 2020. Within New York City's five boroughs, there are 70 outstanding CMBS lodging loans totaling $3.1 billion. Of these loans, 31, or 38% by balance, were delinquent as of the November payment date. Our rated exposure is limited to 11 loans (two of which, are in SASB transactions) totaling $849.3 million.

In Hawaii, 32 lodging-backed CMBS loans, totaling $4.6 billion, are outstanding. Unlike N.Y., Hawaiian supply growth has remained constrained due to prohibitive building restrictions within the state. The Oahu market has exhibited exceptionally strong performance, with RevPAR growing in each of the past 10 years. Nevertheless, the overall Hawaiian market relies entirely on air-travel stemming from both domestic and international markets. Year-to-date through October, occupancy was 42.6% based on available guestrooms; however, this drops to 28.5% when accounting for total room inventory given the significant number of closed hotels. Further straining performance, many Hawaiian hotels are subject to ground leases, resulting in an additional and often large expense that is senior to debt service. Of the 32 outstanding lodging loans, only two loans representing 1% by balance were delinquent as of the November payment date.

Similar to Hawaii, the San Francisco lodging market has performed well over the last decade with RevPAR gains in each year except 2017, when the Moscone Convention Center partially closed for renovation and expansion through early 2019. The market benefitted from the strong technology-based economy, as well as its status as a domestic and international tourist destination. Within San Francisco proper, there are 11 outstanding lodging loans totaling $1.0 billion, and as of November 2020, two of the loans, representing 1% of the outstanding balance, were delinquent.

Chart 2

Based on our review of the special servicer comments for the S&P Global Ratings-rated loans, the borrowers for the delinquent loans are actively working on a resolution strategy with the respective special servicers, which generally included some form of forbearance. The forbearance terms included deferring debt service payments for a short term (three to six months) and providing borrowers with the ability to use servicer-held reserves to pay expenses and debt service. However, with the continued decline in lodging demand in urban markets, we expect that these borrowers will likely need to seek additional forbearance or work with the special servicers on longer-term options, including loan modification, until the net cash flow for the properties securing these loans rebounds.

S&P Global Ratings believes there remains a high degree of uncertainty about the evolution of the coronavirus pandemic. Reports that at least one experimental vaccine is highly effective and might gain initial approval by the end of the year are promising, but this is merely the first step toward a return to social and economic normality; equally critical is the widespread availability of effective immunization, which could come by the middle of next year. We use this assumption in assessing the economic and credit implications associated with the pandemic (see our research here: http://www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.

In our recent surveillance review of outstanding lodging-backed CMBS transactions (see "U.S. And European CMBS COVID-19 Impact: Retail And Lodging Are The Hardest Hit," published Sept. 28, 2020), instead of adjusting our sustainable NCF assumption (since NCF was significantly strained or negative in many cases), we generally increased our capitalization rate between 50 bps-150 bps from issuance, reflecting our view that travel, particularly to urban areas and hotels that rely on corporate, group, and international demand will remain tempered for several quarters. While we do not expect overall RevPAR levels to return to 2019 levels until at least 2023, lower tier chain scale properties and hotels in less densely populated locations will likely recover sooner.

S&P Global Ratings' RevPAR and NCF assumptions from issuance are significantly below recent levels for most loans, as we generally underwrite to levels that were achieved several years prior to (and lower than) the levels at issuance. Due to our lower NCFs and higher stressed capitalization rates, the S&P Global Ratings' values are significantly below market levels. Because we also use lower LTV recovery rates in our determination of rated class proceeds, lodging properties are typically able to withstand large declines in performance before higher rated classes are affected. Further, most U.S. CMBS SASB transactions have an eight-year tail period beyond the loan's extended maturity date, which provides servicers with flexibility and adequate time to orderly liquidate the asset to maximize recovery. We also note that many transactions have unrated first loss classes/HRR (subordinate) classes to help absorb losses.

(i)STR is the source of historical U.S. lodging occupancy, average daily rate, and RevPAR data.

Related Research

• The U.S. Lodging Sector: A Slower Recovery Could Take Until 2023, Nov. 5, 2020
• U.S. Lodging-Backed CMBS Bracing For The Impact Of COVID-19, March 23, 2020
• U.S. CMBS: Supply Gains Take A Bite Out Of Hotel Performance In The Big Apple, Jan. 29, 2020