This week’s announcement of the permanent closure of the iconic 44-story Hilton Times Square hotel in the heart of New York City was a wake-up call for the embattled hospitality industry, especially in urban markets suffering from a coronavirus-driven tourism drought.
The move follows a decision earlier this week by Ashford Hospitality to hand over the keys to its recently purchased Embassy Suites in Midtown West to its lender after the real estate investment trust fell behind in debt payments.
In fact, 34% of hotels in New York City alone are currently delinquent, and hospitality investment bank Robert Douglas sees more hotels at risk of closing.
“Most hotels are using capital reserves to help cover interest payments in the near term and the vast majority of hotels in New York City have missed debt service coverage tests that will result in cash flow sweeps and will limit the ability, absent lender agreement, to get loan extensions that would normally be automatic,” said Doug Hercher, managing director and principal at Robert Douglas. “This is the tip of the iceberg.”
Fourteen New York City properties with loans in the commercial mortgage-backed securities universe are 60 days or more behind payment, according to database of securitized mortgages Trepp. Tracking individual loans, the Standard Hotel in the Meatpacking District, the Holiday Inn in the Financial District and Tryp by 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 draw thousands of tourists and are popular places to stay for business travel.
Broadway is always a natural draw for international tourists, and staying at a hotel nearby is often part of the experience. But with shows not expected to return to the Great White Way until next year, hotels near the biggest theaters remain nearly empty.
Even before the coronavirus pandemic, experts were concerned that there were too many hotel rooms in New York City. Over the last five years, developers added more hotel rooms to the Big Apple than any other market in the U.S. — 6,131 in 2019, up from the 3,696 rooms in 2018, according to hotel management analytics firm Smith Travel Research.
It remains to be seen whether current hotel owners can find the means to pay off their debt and keep the lights on.
“Many hotels will definitely close, particularly those that originally were conversions from residential to hotel and are located in more residential neighborhoods,” Hercher said, explaining that it’s often easy to convert those hotels back into apartments.
“Purpose built hotels like the Hilton Times Square are harder to convert and are not located in traditional residential neighborhoods. In those instances, it’s pretty clear that owners are playing hardball with the unions and will reopen, though maybe under new ownership, if they can get meaningful concessions,” he added.
The stress hotels are facing is not confined to New York City. Trepp data shows delinquencies are rising significantly in Houston, Chicago and Los Angeles.
The American Hotel & Lodging Association and other lobbying groups continue to push Congress for additional financial relief as Paycheck Protection Program loans dry up, leaving owners’ concerns heightened.
“We need urgent, bipartisan action from Congress now to keep hotels open so that our industry and our employees can survive and recover from this public health crisis,” AHLA chief Chip Rogers said.