US hotel property not expected to recover till 2024

New York

DISTRESSED hotel owners may need to wait until 2024 to see a full rebound.

Hospitality property values are forecast to see swift improvements after 2022 though a full rebound for all types of hotels is years away, according to real estate data firm CoStar Group Inc. The sector has a lot of ground to cover as valuations on hotels tied to defaulted or distressed loans securitised in commercial mortgage-backed securities fell more than 20 per cent last year from origination appraisals.

"This time around, economy and midscale properties, as well as extended-stay hotels weathered the downturn better than luxury and full-service hotels," Xiaojing Li, managing director at CoStar Risk Analytics, said in an interview. "The opposite was true during the Great Financial Crisis, where the economy hotels performed worse."

The data firm predicts distressed hotel asset values will recover at least 50 per cent of their recent losses by 2023, and be back to pre-pandemic valuation levels by 2024. Retail, on the other hand, had already been distressed pre-Covid and property valuations tied to defaulted loans dropped nearly 40 per cent last year, the data show.

"But even there, there still will be outperformers in the retail sector," Li said. "In fact, there will be winners and losers across all property types and geographies this time around. Regional malls, of course, have been struggling the most. But industrial and apartments will likely be among the winners."

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CoStar's projections, which applied average property-sector growth rates to valuations over the next nine years, showed industrial and warehouse properties faring the best of all property types. Valuation declines were shallower last year and the sector is already recovering rapidly, having benefited from the need for cold storage warehouse facilities as people sheltering in place ordered food online for delivery.

Commercial real estate has struggled over the last year as Covid-19 kept shoppers out of malls, travellers away from hotels and workers home from offices.

The downturn pushed about US$146 billion of commercial real estate into a serious risk of bankruptcy or default at the end of last year, with the pain concentrated in hotels and retail, according to data compiled by Real Capital Analytics, a commercial real estate data firm.

Recoveries will be especially mixed for the hotel sector, depending on chain, location, and type of hotel.

"As the vaccine is rolled out to a larger portion of the population and as air travel picks up again, we do expect an uneven recovery," analysts led by Gunes Kulaligil said in a Wednesday research note from Methodical Valuation and Advisory, a securtisation-focused valuation firm.

"Business travel is unlikely to return to pre-pandemic levels soon, so drive-to type hotels and destination hotels are likely to fare better than hotels in business districts in the short term."

Despite the pain realised by property owners, we haven't seen the distressed-sale wave yet for the current recession, Li said. These stressed sales may arrive soon, likely starting with New York City hotels, which relied on tourism and are in a particularly difficult situation.

Last year, there were already distressed sales for Vornado Realty Trust's Crowne Plaza Times Square Manhattan, as well as for the Surrey Hotel and the Hilton hotel in Times Square. BLOOMBERG