Commercial Real Estate Debt: Expect a Protracted Recovery in Hotels

This Commercial Real Estate Debt sector report is excerpted from the First Quarter 2021 Fixed-Income Outlook.

Given the pandemic’s social distancing guidelines, shelter-at-home directives, and restrictions on business travel and conferences, it was no surprise that the U.S. hotel sector was hit particularly hard in 2020. The low point for hotels was in the week ending April 11, just weeks after the number of confirmed COVID-19 cases began to accelerate. While there has been a modest recovery, by the end of December 2020 revenue per available room (RevPAR) was still down roughly 50 percent year over year.

Weekly room demand has only recovered to $11.9 million per week, well below the pre-COVID level. All hotel markets felt some degree of distress, though some were less affected than others. Drive-to markets fared better than denser urban markets, which are more dependent on air travel and conference business. Likewise, extended stay hotels have weathered the downturn better than other types of hotels, and economy hotels have fared better than luxury properties.

The impact of the hotel downturn on outstanding hotel debt is still to be determined. Since April 2020 hotel borrowers have been asking their lenders for relief to bridge a period of low occupancy. Hotel borrowers have also been actively taking advantage of Paycheck Protection Program (PPP) loans. Some lenders have started to sell distressed hotel debt, but with very few post-COVID transactions trading in the market to date, it is uncertain how much further hotel prices may fall this year. RevPAR recovery will be closely linked to efforts to contain the virus and the return of both business and leisure travel. Without this assurance, it is unlikely that RevPAR will see a quick bounce back. A protracted recovery for the U.S. hotel industry will demand patience from both investors and lenders.

Hotels have been hit hard by the pandemic, but no property type has been unscathed. The pandemic has accelerated the shift to online shopping, and the retail sector is experiencing distress from tenants unable (or unwilling) to pay rent. Elevated unemployment will likely result in rising apartment rent delinquencies. Some office tenants are choosing to retain cash in lieu of paying rent. The full impact of the pandemic on office vacancy will likely not be understood until mid-2021 as office tenants are deferring making decisions on long-term leases. And, although less directly affected, the industrial sector will not be spared either.

As the virus continues to infect commercial real estate, we are closely monitoring COVID-19’s impact on cash flows and resulting effects on property values in 2021. Our recent investments have been focused in the industrial distribution sector, as companies accelerate investments in real estate assets critical to the supply chain delivering goods to consumers. These properties have continued to perform well, often backed by long-term net leases guaranteed by investment-grade tenants.

—Jennifer A. Marler, Senior Managing Director; Margot Latham, Managing Director

Important Notices and Disclosures

This article is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment product. It contains opinions of the authors but not necessarily those of Guggenheim Partners or its subsidiaries. The authors’ opinions are subject to change without notice. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is no guarantee of future results.

Investing involves risk. In general, the value of fixed-income securities fall when interest rates rise. High-yield securities present more liquidity and credit risk than investment grade bonds and may be subject to greater volatility. Asset-backed securities, including mortgage-backed securities, may have structures that make their reaction to interest rates and other factors difficult to predict, making their prices volatile and they are subject to liquidity risk. Investments in floating rate senior secured syndicated bank loans and other floating rate securities involve special types of risks, including credit risk, interest rate risk, liquidity risk and prepayment risk. Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Funds Distributors, LLC, GS GAMMA Advisors, LLC, Guggenheim Partners Europe Limited, and Guggenheim Partners India Management.

©2021, Guggenheim Partners, LLC. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Guggenheim Partners, LLC.

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