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Epic Real Estate Crisis Looms as Wealthy Funds Dodge Hotel Payments

Last Updated September 23, 2020 2:01 PM
Andrew Packer
Last Updated September 23, 2020 2:01 PM
  • Real estate has held up well during the selloff despite rising mortgage delinquency rates.
  • Private equity firm Blackstone has joined in by skipping mortgage payments on its hotel properties.
  • Losses in the hotel sector may spill over to the commercial industry as a whole–perhaps even housing.

Real estate is in serious trouble.

Most investors have focused on housing numbers. Although housing has held up well considering a global shutdown over the past few months, delinquent mortgage payments remain elevated.

But the real cracks are appearing in commercial markets, starting with the hotel space.

With some markets shut down entirely for hotels, it’s no surprise that there would be a strain there.

Even Wealthy Funds are Hoarding Cash Over Making Payments on Hotel Properties

But when the wealthy owners of commercial properties are starting to skip payments, it’s a sign of a big crisis underway.

That’s the case right now with Blackstone. One of the world’s largest alternative asset managers, it has a massive footprint in the real estate space. They just joined the “skipped payments” club, with a $274 million loan held against four hotel properties. 

The company says it had tried to work with its lender and reach a forbearance plan when the properties were required to close. And that the properties had challenges even before a global pandemic shut them down entirely.

But they’re not the first fund to run into trouble with their hotels shut down for just a handful of months right now. Colony Capital has defaulted on a $3.2 billion loan  backing 29,000 hotel rooms.

Deliquent hotel loans
Hotel loan delinquencies soared as the sector endured a shutdown, with no sign of a turnaround even as economies open up again. | Source: Americanbanker.com 

Data analytics firm Trepp calculated that about 20% of hotel loans are now in arrears. 

The hotel industry is shaping up to be in the worst spot as some regions talk about stalling their plans to reopen their economies.

CBRE Hotels Research sees hotel occupancy at around 42%  right now. The prior low of 44% was set in 1933, at the bottom of the Great Depression.

Hotel deliquency rate
Hotels are expected to operate at less than half their occupancy rate this year, setting a new record low. | Source: hotelmanagement.net 

Given the leverage inherent in real estate, it’s no surprise that a few months without payments can throw billions of dollars of wealth into disarray.

Hotels are the Tip of the Iceberg for Real Estate

But behind those shuttered hotels are closed restaurants and movie theaters as well. It’s easy to see these commercial real estate markets get into trouble too. And malls were suffering before the shutdowns to boot.

As a whole, the picture for commercial real estate isn’t pretty.

Even worse, as these businesses remain closed, job recovery will be difficult, which will also spill over into housing.

Housing will fare best of all, given the lower leverage there following the 2008 housing crisis, as well as the high-demand, low-supply picture over the next few years.

But the worse other parts of the market gets, the more likely even housing prices could start to move downward as well.

It’s not just one of your neighbors having trouble making mortgage payments. It’s the companies keeping people employed having trouble.

And right now, rising delinquencies suggest that a recovery will be slower and longer than most suspect.

Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com.