When the pandemic hit last winter, hotels were immediately impacted because they have the shortest lease term that is being priced daily. The pandemic brought tourism and hospitality to a halt for months, which affected hotel revenues immediately. This week’s chart highlights the two-year changes in occupancy (OCC), average daily rate (ADR) and revenue per available room (RevPAR) among various hotel segments across the U.S.
The full service and luxury segments of the hotel market were the most severely impacted and are still facing the greatest headwinds. A resumption of conventions and other business travel could reverse this. Business travel is expected to pick up later this year, as the larger population becomes vaccinated and firms lift their travel restrictions. On the other hand, the midscale and economy hotel segments have fared better because they serve leisure or weekend travelers and day-trippers. Hotel operators expect domestic travel to be the number one contributor to the local economy since more people are investing in domestic travel experiences.
Air travel is beginning to pick up as domestic scheduled flights in the U.S. are approaching pre-pandemic levels. The Transportation Security Administration (TSA) surpassed the 2 million threshold for travelers screened in one day last month, the first time since March 2020. The growing number of travelers is an indication that the airline industry is coming back to life and provides a more positive outlook for tourism and hotel markets.
Hotels are one of the main property types within commercial mortgage-backed securities (CMBS). Prior to the pandemic, hotels comprised nearly 15% of CMBS transactions on average. In the wake of the crisis, investors became more risk-averse with regard to hotels, and now they average around 5% of CMBS conduit transactions. While delinquency rates for hotels spiked above levels seen during the financial crisis and remain elevated, we are beginning to see meaningful and consistent declines in both delinquency and special servicing rates. Modifications have been the primary workout strategy for hotel loans in CMBS transactions. A rebound in travel and hotel demand should dramatically reduce potential loss outcomes for deals.
With more Americans getting vaccinated, people are traveling again this summer. Successful vaccinations and additional savings throughout the past year have given American consumers the means to travel. I would expect to see a modest improvement in delinquency rates and performance metrics across the various hotel segments in the coming months. I plan to do my part this summer, taking to the friendly skies and open road on a multi-city vacation. Enjoy your summer travels!
The material provided here is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.
This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
Opinions and statements of financial market trends that are based on current market conditions constitute judgment of the author and are subject to change without notice. The information and opinions contained in this material are derived from sources deemed to be reliable but should not be assumed to be accurate or complete. Statements that reflect projections or expectations of future financial or economic performance of the markets may be considered forward-looking statements. Actual results may differ significantly. Any forecasts contained in this material are based on various estimates and assumptions, and there can be no assurance that such estimates or assumptions will prove accurate.
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