In the latest pandemic-related travel headlines, Chicago’s iconic Palmer House, a Hilton hotel, has been sued for foreclosure, threatening to end its 147-year-long run. The 1,641-room property—the second largest in the city—has defaulted on a $333.2 million mortgage, and it’s not the only hotel to have done so due to the lack of business during the COVID-19 pandemic. But will more hotels follow in their shoes? The answer is more complicated than you might think.
Hotels are in a financial bind.
With travel halted due to the pandemic, hotels have lost business—a lot of business. Per the American Hotels & Lodging Association (AHLA), hotels in the U.S. have already lost $46 billion since the beginning of the pandemic and are on track to continue to lose about $400 million per day.
Currently, hotels are faced with a tough decision: remain closed throughout the pandemic and simply eat up the costs incurred even in closure (insurance, property taxes, mortgage payments, and the like) or open their doors and hope to make some money.
The problem with the latter is that there isn’t enough business to break even with expenses: one AHLA report says that 65 percent of U.S. hotels have occupancy rates below 50 percent, with another saying some U.S. hotels are projecting occupancy rates below 20 percent.
According to hotel industry profit-and-loss database HotStats, the average break-even occupancy rate—that at which they are neither earning nor losing money while operating—for hotels in the United States is 37.3 percent. If hotels are not able to come close to their break-even rate, it doesn’t necessarily make sense for them to open up.
There is, however, a massive difference in financial performance between urban hotels and resorts. “Resort hotels, such as domestic resorts on the coasts of the United States, have performed extremely well this summer. Some beach resorts have actually performed better than the same summer period in 2019, given the significant demand from pent-up travelers,” Kristina D’Amico, a director at hospitality consultancy HVS who specializes in hotel valuations, told TripSavvy.
“Unfortunately, the urban situation is difficult. People are afraid to be in the cities, leisure travel is limited, and business and group travel is nonexistent.”
As such, hotels in cities are turning to alternative revenue streams—like offering discounted rates for medical personnel or airline crews or even turning into homeless shelters, with state governments paying the tab. But despite these stopgaps, urban hotels are still suffering far more than their resort counterparts.
Will many city hotels close permanently, then?
A recent report on hotel commercial real estate by analytics company Trepp shows that 23.4 percent of U.S. hotels are at least 30 days delinquent on their loans as of July 2020, compared to just 1.34 percent in Dec. 2019.
As such, several large hotels have entered foreclosure and will likely shutter permanently. Some of the recent casualties include the Hilton Times Square, the Maxwell Hotel, and the W New York – Downtown, all in New York City, and Chicago's historic Palmer House, which has just entered foreclosure proceedings.
"Convention hotels like Palmer House are significantly challenged right now, given each state's restriction on how many people can be in a large group at the same time. Plus, the majority of trade shows and conventions have been canceled, further impacting these hotels," said D'Amico. "It is almost impossible for these hoteliers to fill these rooms with the meeting and convention business gone, which is typically 50 percent of the total demand at these properties." A representative from the Palmer House declined to comment.
But it's not all doom and gloom for these hotels. Take, for instance, the resurrected Times Square Edition in New York. After its parent company Marriott announced in May that it would close the hotel permanently in August, the luxury property, which only opened in March 2019, was saved by lenders—the hotel will reopen.
"In general, lenders are working with owners on a case-by-case basis to help keep them afloat," explained D'Amico. "Most forbearance was for six months, but given that this pandemic has dragged on longer than that, lenders are returning to the borrowers to provide them with other financial options to get through 2020."
So even if things seem financially worrisome for a hotel—like the case of Palmer House—there's still a strong chance a hotel will be saved. (In fact, Palmer House is already a phoenix: it was rebuilt after burning down in the Great Chicago Fire of 1871.)
The bottom line: Most hotels are in limbo—and might be for a long time.
We’re not saying all is bright and cheery in the hotel world—and for the thousands if not millions of laid-off and furloughed hospitality employees, things are undoubtedly grim—but there are too many unknowns to fully predict what’s going to happen to hotels. More likely than not, we’ll see a range of outcomes, primarily based on the age and location of the properties, according to D’Amico.
“A large majority of the hotels that are delinquent and in dire straits were already struggling prior to the pandemic,” she said. “Hotels that were at the end of their economic life cycle to begin with will likely be torn down, and the land will be held for future development. Other hotels may be redeveloped as new hotels or even residential properties.”
Per D’Amico, the industry will be conducting numerous studies to see if the future continuation of a hotel is feasible, after which owners will work closely with lenders to attempt to find a solution, especially in the case of iconic properties like Palmer House. All in all, these processes can take months or longer, meaning we might not see many permanent closures for some time yet.
AHLA. "State of the Industry Analysis: COVID-19 Six Months Later." Aug. 31, 2020
HotStats. "Analysis: At What Occupancy Rate Can a Hotel Break-Even?" May 13, 2020