The commercial real estate industry has been closely monitoring the issue of debt maturities for over a year now. While most discussions have focused on office and multifamily properties, a recent report from JLL highlights another sector that is cause for concern – hospitality. Specifically, there are $5.8 billion worth of U.S. hotel single-asset securitized loans (such as CMBS and CRE CLOs) set to mature in 2024.
According to the report, even though the hotel industry has seen strong RevPAR numbers due to increased leisure demand and a return of business travel, there are still several challenges that could hinder owners from refinancing these loans and may instead lead them to sell their properties.
One major obstacle is profitability; despite higher RevPAR levels in 2023 compared to pre-pandemic levels in 2019, many markets heavily reliant on international business and group demand continue to struggle with increasing labor costs, property taxes, and operational expenses – particularly those located in gateway cities.
Another factor contributing towards potential difficulties with refinancing is persistently high interest rates. Since 2020 alone, average fixed interest rates for U.S. hotel securitized loans have risen by an alarming rate of 332 basis points reaching an average rate of 7.7% as reported by JLL experts; floating rates aren’t faring much better at an average rate of 8/3%. With no indication from The Federal Reserve about lowering its Effective Federal Funds Rate (EFFR), borrowers facing upcoming loan maturities will likely find it challenging or unfeasible option when considering refinancing options which may result into selling off their assets instead according analysts at JLL who recently attended The Federal Open Market Committee Meeting .
Additionally ,property insurance costs continue rise due inflationary pressures along with climate change related weather hazards . This trend poses significant challenge hotels’ cash flows while also elevating credit risk especially for properties located in coastal gateway markets.
The JLL report also highlights that if these $5.8 billion worth of loans were to be refinanced at current interest rates, the majority would struggle to generate enough income to cover their debt costs. However, there is a silver lining as JLL forecasts a decline in the number of maturing loans facing critical stress (totaling $4.2 billion) over the next few years which presents an opportunity for investors looking to take advantage of this market dislocation according analysts at JLL who recently attended The Federal Open Market Committee Meeting .
