The 'City that never sleeps" is teetering on thin ice. Well, at least the multi-billion dollar hotel industry is.
Since COVID-19 hit, New York was one of the harder hit cities. Tourism was totally cut off as lockdowns began and business travel stopped. There is a chance that this has long-term impacts since business travel is expected to be reduced as companies find alternate ways using online applications.
This could be a major hit to the bond market. According to FT.com, there are $4 billion in hotel mortgages bundled in commercial mortgage-backed securities.
The challenge is that almost 80% of these mortgages are in danger.
Even those within the industry are not truly optimistic.
Vijay Dandapani, chief executive of the Hotel Association of New York City, said that if half the city’s 640 hotels survive it will be a “great” outcome. Occupancy rates in September remained 20 per cent lower than for the same month in 2019, despite recovering from their worst point in April where occupancy was down more than 60 per cent year on year, according to data from STR.
We could see this situation turn even worse if more lockdowns are on the way. As we enter the winter season, it is expected that COVID-19 cases will increase. This means more restrictions on travel which will further blast hotels revenues.
Many in the market are hoping that a vaccine will be found. However, this will not be enough to save the New York Hotel Industry. No matter when it comes, it will be too late. The downward pressure is going to carry through the first quarter, at a minimum.
Even if things do return to "normal", there will still be a hangover effect among the public. Are people going to be quick to travel again? This week, Disney posted its first loss in 40 years. Anything to do with hospitality is a problem right now.
Losing half the hotels in New York will send major ripples through the entire commercial real estate market.
The Hilton Times Square hotel already closed last month as the property owners simply walked away. We also saw the Roosevelt Hotel which opened in 1924 close down.
A major question is how do major cities hold up after all this clears up. There is a good chance that people start to shun the urban areas in favor of the suburbs. Couple this with the expected impact from the work from home concept that is starting to take hold, we could see the appeal of cities starting to diminish.
If this is the case, the commercial paper back the New York Hotel industry is just the start. We will see a lot more properties around the nation go bad.