Retailers fall behind on loans, setting stage for an altered landscape | News

New York’s historic Roosevelt Hotel shut down last month, the latest casualty of the coronavirus pandemic that has upended the city’s tourism and retail markets.

Many more hotels and retail properties in the nation’s biggest cities across the country are struggling.

In the New York area, the owners of 43 hotel loans were delinquent on loans backed by $1.5 billion in bonds as of Oct. 31, according to Trepp LLC, a research firm.

Another 30 owners of shopping malls and storefronts in the greater Chicago area were facing similar financial problems with loans backed by more than $630 million in bonds.

And that’s two sets of borrowers in two of the hardest-hit areas of the economy in two of the biggest cities in the United States.

Coast to coast, more than a thousand hotel and retail borrowers have defaulted on more than $35 billion in loans since the coronavirus pandemic stalled travel and tourism and made visits to shopping mall unappealing, especially with easy online alternatives for consumers.

As it stands now, nearly 20% of all hotel loans and slightly more than 14% of all retail loans originated by commercial real estate lenders and packaged into securities that are sold to investors are now delinquent.

“The pandemic has had the most immediate and dramatic impact on hotels and motels, as we’ve taken a vacation from vacations,” said Jamie Woodwell, vice president of commercial real estate research at the Mortgage Bankers Association. “It’s also put a lot of stress on retail, where the conversion to online purchasing that should have happened over five years has accelerated and is now taking place over a matter of months.”

The result is that shopping malls are becoming obsolete far faster than anticipated. Nearly $20 billion in loans tied to malls anchored by the now-bankrupt JCPenney and Neiman Marcus department stores are now in default, according to Trepp LLC.

Hundreds of America’s 1,100 malls are expected to shut down because of COVID-19 and pressures from online retailers, experts say, and as many as 25,000 stores will close this year, according to Coresight Research, a research and advisory firm.

New York alone could lose 20% of its hotel rooms by the time the pandemic is over, according to Cushman & Wakefield. That’s 6,800 rooms that will be converted to some other use.

“The hotel industry has been devastated by this pandemic,” said Stephen Michels, the managing director for Cushman & Wakefield’s hospitality practice. “The combined impact has been greater than 9/11 and the financial crisis combined. It’s been very painful for a lot of owners.”

Occupancy rates across the country dropped to 33% for the three months ended June 30 from 70% during the same period in 2019, while average room rates dwindled to $83 per night from $133, according to Cushman & Wakefield, a global real estate services firm.

Once a vaccine has been identified and delivered, Michels says the hotel and motel industry will begin to recover and should hopefully be back to full strength by the beginning of 2023. Leisure tourism is expected to bounce back first, followed by corporate travel and finally by group travel and international tourism.

“Large citywide convention and major group bookings have longer lead times than leisure travel,” Michels said. “It takes six to nine months for the group market to get back into full swing.”

In the meantime, however, Michels expects a lot of owners to default on their loans and a lot of properties to change hands. In some markets, like New York, there will be a large decrease in total hotel rooms before the shakeout is over.

No postponing the inevitable

For shopping malls and storefronts in urban areas, the carnage wrought by the…