This week's announcement of the final closure of the iconic 44-story Hilton Times Square hotel in the heart of New York City was a wake-up call for the competitive hospitality industry, particularly in urban markets suffering from a coronavirus-induced tourism drought.
The move follows a decision by Ashford Hospitality earlier this week to hand over keys to the recently acquired Embassy Suites in Midtown West to the lender after the real estate investment trust fell behind in debt payments.
In fact, 34% of New York City hotels are currently criminal, and hospitality investment bank Robert Douglas sees more hotels at risk of closure.
"Most hotels use reserves of capital to cover short term interest payments, and the vast majority of New York City hotels have missed debt service coverage tests that will result in cash flow sweeps and limit the ability to receive loan extensions that are usually automatic without a lender agreement." said Doug Hercher, executive director and principal at Robert Douglas. "This is the tip of the iceberg."
According to Trepp's Securitized Mortgage Database, 14 New York City properties with loans in the commercial mortgage-backed securities universe are 60 days or more behind payment. The Standard Hotel in the Meatpacking District, the Holiday Inn in the Financial District, and Tryp on Wyndham Times Square South are among the properties that have defaulted.
A large number of these hotels are located in and around Times Square and Midtown, neighborhoods in New York City that typically attract thousands of tourists and are popular places for business trips.
Broadway is always a natural draw for international tourists, and staying in a nearby hotel is often part of the experience. With shows not expected to return to the Great White Way until next year, hotels near the largest theaters remain almost empty.
Even before the coronavirus pandemic, experts were concerned that there were too many hotel rooms in New York City. Over the past five years, developers have added more hotel rooms to the Big Apple than any other market in the US – 6,131 rooms in 2019 versus 3,696 rooms in 2018, according to hotel management analyst Smith Travel Research.
It remains to be seen whether current hotel owners will find the means to pay off their debts and keep the lights on.
"Many hotels will definitely close, especially those that were originally converted from residential buildings to hotels and are located in more residential areas," said Hercher, explaining that it is often easy to convert these hotels back into apartments.
"Purpose-built hotels like the Hilton Times Square are harder to remodel and are not in traditional residential neighborhoods. In these cases, it's pretty clear that the owners will be playing hardball with the unions and reopening, albeit in new ownership, when they can get." meaningful concessions, "he added.
The stressful hotels are not limited to New York City. Trepp data shows that Houston, Chicago and Los Angeles are seeing significant arrears.
The American Hotel & Lodging Association and other lobby groups continue to urge Congress for additional financial relief as Paycheck Protection Program loans dry up and owners' concerns mount.
"We now urgently need bipartisan measures by Congress to keep the hotels open so that our industry and our employees can survive and recover from this public health crisis," said AHLA boss Chip Rogers.