Houston’s Hotel Sector Is More Distressed Than Other Major Cities
Houston’s hotel sector is far more distressed than the national average, reflecting the combined financial pressures of an energy downturn and the widespread impact of the coronavirus pandemic on the entire travel sector.
The lodging delinquency rate in Houston where borrowers are more than 30 days behind on CMBS loan payments reached 73% in December, according to Trepp. In comparison, the national hotel CMBS delinquency rate was 19.8% during the same month. Similarly, the special servicing rate in Houston was 73.77% in December, compared with the national rate of 24.07%.
“Of all the big-ish or metro areas in America, and population-wise, Houston has definitely been at the bottom of the list in terms of how the lodging sector is performing,” Trepp analyst Jyoti Yadav said.
The number of delinquent CMBS loans that have been transferred to special servicing nationally is at the highest level since the aftermath of the Great Recession. Loans have also been going to special servicing much faster than during prior recessions, thanks to the almost-overnight cease in travel.
The severity of Houston’s CMBS hotel debt situation has been exacerbated by the decline of crude oil and natural gas prices. The downturn has been underway since late 2019 and is the result of increasing oil and gas production levels. As the corporate heart of the U.S energy sector, Houston is home to around 4,600 energy-related firms, including big players like Phillips 66, Occidental Petroleum and Kinder Morgan.
“Houston hotels were showing signs of stress pre-pandemic, especially with some of the energy companies pulling back and the related loss of business travel related to that,” Morningstar Senior Vice President David Putro said.
Houston First Corp. told Bisnow that business travel accounted for 24.7% of Houston’s overall hotel occupancy in 2019. In 2020, business travel room nights fell by 59.8%, and in January they are down 76% compared to the same month a year ago.
Aside from energy sector-related business travel, Houston is also home to many energy-related events and conventions, including IHS Markit’s CERAWeek and the Offshore Technology Conference. In particular, OTC can draw between 50,000 and 100,000 people each year and has generated more than $3.2B for Houston’s economy since it was first founded in 1969.
OTC has been postponed to August this year, while CERAWeek will be held virtually for the first time in March. The World Petroleum Congress, a major international conference that occurs once every three years and was slated for Houston in 2020, has been rebooked for early December 2021.
Houston is benefiting from rising demand for leisure travel on weekends, which began to materialize in the summer of 2020 and continued into the fall. But even if a bounce back in widespread travel does begin in 2021, Houston and the broader U.S. travel sector are still facing a recovery that could stretch into 2024.
As the majority of hotels across the city continue to struggle, the value of those properties is coming into question. Putro noted that some CMBS hotel properties in Houston are being reappraised at discounts of up to 50% or 60% of their original issuance appraisals. If the number of properties appraised with lower values gains momentum, it could contribute additional downward pressure on the market.
“It's not just the severity of the haircuts that are coming in on these new appraisals on these defaulted or distressed Houston hotels, but also the number of properties that we're seeing come through with appraised values that are discounted that much,” Putro said.
However, Yadav said that evaluation cuts are the worst-case scenario for hotels, and that it is not happening on a widespread scale yet as many players in the CMBS market wait to see if vaccine rollouts could lead to a fast reversal in travel volume.
“I would say that valuations, where they are being cut right now, is [a] one-off situation, one-off case, that is not necessarily happening in the entire market,” Yadav said. “Specifically because of the fact that there might be a bounce back come 2021, like [in the] fall or something.”
Though Houston’s hotel delinquency and special servicing rates both sit at around 73%, not every property shares an equal amount of distress, and some were already entering that process prior to the coronavirus pandemic. A distressed CMBS borrower that still made a loan repayment in 2020 was likely doing well before the pandemic, according to Yadav.
Hotels in different submarkets have also experienced the pandemic differently. Downtown Houston and Galleria assets have experienced lower occupancy levels during the pandemic than suburban hotels, as they are typically the ones that cater to business travelers.
The eight Houston hotels below made their last CMBS loan payment in 2020, and have since transferred those loans to special servicing, according to Trepp data that references special servicer notes.
Hilton Houston Post Oak
Address: 2001 Post Oak Blvd.
Outstanding loan balance: $42.6M
Last payment date: 5/1/20
Transferred to special servicing: 5/18/20
Delinquency status: Foreclosure in process
***
Marriott Galleria
Address: 1750 West Loop South
Outstanding loan balance: $30.2M
Last payment date: 3/1/20
Transferred to special servicing: 5/14/20
Delinquency status: Foreclosure in process
***
Crowne Plaza Houston Katy Freeway
Address: 7611 Katy Freeway
Outstanding loan balance: $29.6M
Last payment date: 3/6/20
Transferred to special servicing: 5/14/20
Delinquency status: Foreclosure in process
***
Crowne Plaza Houston River Oaks
Address: 2712 Southwest Freeway
Outstanding loan balance: $23.5M
Last payment date: 9/6/20
Transferred to special servicing: 7/8/20
Delinquency status: Foreclosure in process
***
Hilton Garden Inn Houston
Address: 7979 Willow Chase Blvd.
Outstanding loan balance: $18.6M
Last payment date: 4/6/20
Transferred to special servicing: 12/13/19
Delinquency status: Foreclosure in process
***
Hilton Houston Galleria
Address: 6780 Southwest Freeway
Outstanding loan balance: $14.6M
Last payment date: 4/11/20
Transferred to special servicing: 7/17/20
Delinquency status: Foreclosure in process
***
Homewood Suites Houston
Address: 13110 Wortham Center Drive
Outstanding loan balance: $11M
Last payment date: 10/1/20
Transferred to special servicing: 10/20/20
Delinquency status: Real estate owned
***
Best Western Fountainview
Address: 6229 Richmond Ave.
Outstanding loan balance: $5M
Last payment date: 7/6/20
Transferred to special servicing: 4/9/20
Delinquency status: Foreclosure in process
