November 2020 Florida Hotel Retail Impact of Covid
A new analysis shows that an outbreak of the coronavirus has already caused more than $1.5 billion in damage to Florida’s hotels and resorts in the state.
The delinquency rate for CMBS loans rose to 7.2 percent last month, from 2.3 percent in April, the largest increase in delinquencies since 2009. Experts are already expecting the coronavirus and the economic cliff to be a major blow to Florida’s hotel and resort real estate sector. The figures show that hotel borrowers have not repaid loans since April, which is a “very, very bad sign,” said Mark Trepp, executive director of the Florida Hotel and Resorts Association (FHRA) and a former senior vice president at the National Association of Realtors (NAR). The increase in late payments is a warning sign of how bad things could get for retailers and hospitality businesses, Trepps said.
By 2023, the default rate on hotel loans could be 35 percent, followed by retailers at 16 percent, Trepp said. In one scenario, the hospitality industry is projected to be hit hardest by 2020, with a delinquency rate of 30% in 2026 and a default rate of 25% per year.
Although these figures do not take into account hotels that have closed, such as Covid 19, occupancy could be much worse as many hotels are under-reported. Given the broader economic impact of the pandemic, some hotel and retail borrowers may turn away or feel the process is too difficult. Smaller hotel owners would have found it particularly difficult to finance themselves in markets where credit is scarce. The pool, which is largely made up of hotel bonds, will not do so well without a few of them.
Given the potential exposure to default caused by the COVID-19 crisis, lenders need something fairly simple and standardized to have time for economic recovery.
Although this article applies to all types of real estate, it focuses on the indicators used by hotel owners in particular. South Florida has the second largest number of mortgage-backed securities in the country, with more than $32 billion in commercial real estate loans. Of those, more than half a billion are in special services, according to the Florida Department of Finance.
With the pandemic driving U.S. occupancy rates to record lows in recent months, Rodriguez said his company has stopped paying dividends to investors and believes it will break even by the end of 2021. The number of CMBS loans for retail customers that were not repaid in April rose to 9% from 1.7% in March, Trepp said, and leniency on defaulting loans has increased.
With so much uncertainty, banks and alternative lenders are equally cautious about issuing new bonds and may remain wary for a while, sources said. In the future, hiring of borrowers and lenders could be muted as fees rise and CMBS loans are revised, sources said.
Hotel and retail owners are scratching their heads to figure out how best to manage their mortgage-backed securities. Lenders and CMBS service staff are currently working late into the night on the catalogs, according to the data.
Given the general uncertainty today, it is understandable that lenders are reluctant to take immediate action against defaulting borrowers. This is not to say that commercial real estate lenders cannot foreclose, but it is far from saying that foreclosure initiated at that point will be the end of the line for the borrower, or even the beginning of it. To begin a forbearance or elaboration conversation with borrowers, a lender may require that they execute a pre-negotiation agreement while the credit agreement is still in full force and effective. Before any negotiated agreement is reached, borrowers must generally acknowledge that the loans may be in default, the exact amount owed and whether or not they have not yet been foreclosed on for default. It is not the same as saying that a commercial lender or service provider is unable to service a loan.
If these conditions are not met, the grace period ends and the lender can negotiate an automatic stay of execution for at least 30 days. Lenders can (and should) also use language in the language of leniency that requires the borrower to agree to jurisdiction in a lawsuit if a later foreclosure occurs and / or to involve a service or specialty service provider on their behalf. Moreover, borrowers can also agree to waive their right to an “automatic deferral” if they file for bankruptcy later, even though the bankruptcy court enforces that waiver.
As a securitised loan, the loan will continue to be subject to a special service and will therefore not be returned to the status of “efficient.” If the COVID-19 restrictions on redundancies are lifted, any resulting impact on the property valuation will result in the loan being cancelled and the loans being serviced by the main service provider. Default remains a continuation, but unlike securitized loans, these loans will remain subject to “special servicing.”
It’s not the fault of the borrowers. We’re in a pandemic which is different from the crash of ’08. If the banks transfer to a new owner-management they are facing the same issues, confirmed by developer Cohen.
Hotel, Retail and Student Housing are the most hardest hit at the moment. The retail market was in the process of slowing down before Covid. Large corporations and office lease holders may not currently have a lot of their employees working in offices. But it is not to say that there is not a need for office headquarters. Some say productivity can tend to be higher when employees are working in offices. Now with the new normal and Covid, spacing employees further apart may become a requirement.
Written by DistressedCommercialAssets.com
Donna Jean’s team specializes in off market and distressed commercial properties.
Donna Jean Coquilla 10/27/20
