Lodging Sector Posts Large Drop in Delinquency

The lodging sector delinquency rate dropped 41 basis points to 15.95% in March, according to Trepp.

The March decline comes on the heels of February’s 272 basis point decline to 16.38%, which was the most significant drop in the delinquency reading since October 2020.

In February, the reduced rate was concentrated in the ‘other’ and full-service property subtypes, which saw declines of 705 and 169 basis points, according to Trepp.

In March, extended stay experienced lower delinquency rates hitting 7.31%. Trepp points to Blackstone and Starwood Capital Group’s proposed acquisition of Extended Stay America for $6 billion as a sign of the subtype’s more robust performance relative to other lodging segments.

Also, the lodging sector’s servicing rate dropped slightly to 24.25% in March. Still, the rate is higher than other commonly tracked CRE-property subtypes. The special servicing rates are more than 20% in the full-service, limited-service, and ‘other’ subtypes.

As another instance of the lodging sector’s issues, more than 440 loans had their value reduced since 2020, which totaled more than $1.3 billion in reductions as of February 2021, according to the TreppInsights Business Intelligence tool.

But the lodging sector’s problems have varied by city. Since Trepp evaluated lodging distress in October, most MSAs have seen a reduction in delinquency rates. However, the New York-MSA has seen a 17% increase in the timeframe. The Los Angeles MSA, on the other hand, has seen its delinquency rate drop from 27.04% in October to 14.68% in March.

Since October, servicing rates have been above 70% in the Portland and the Houston-MSAs. The New York-MSA has seen its special servicing rate jump 840 basis points to 53.08%. Trepp attributes the high rates to these cities’ shutdown orders and lower levels of tourism.

But with widespread vaccinations and the economy opening up, things could be improving for the lodging sector. “At this point in 2021, the economy looks to show signs of continued improvement,” said Maximillian Nelson, Trepp research analyst, in a prepared statement. “The Federal Reserve, fresh off the heels of a $1.9 trillion relief bill, is committed to keeping interest rates low and maintaining an accommodative monetary policy which could, in turn, affect the lodging commercial real estate sector, which has been greatly impacted by the coronavirus pandemic.”

Some of these problem loans in lodging have led to distressed sales. While CRE as a whole hasn’t seen distressed sales yet, 8% percent of hotel sales involved a distressed asset between March of 2020 and February of 2021, according to Real Capital Analytics. This percentage takes on greater significance as there were very few hotel transactions in that timeframe, with only $10.6 billion traded, RCA says. By comparison, $36.6 billion traded in the prior 12-month period.