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Gulf Coast hotels face “hair on fire time”

by Kevin McQuaid (Business Observer)

Nick Plasencia was quoted in this article published on May 1, 2020. The full article is available on the Business Observer website.

Lodging properties are getting creative in the fight against coronavirus pandemic.

Amid one of the steepest declines since the Great Depression brought about by the Covid-19 pandemic, the hospitality industry along the Gulf Coast and nationwide is grappling with ways to generate revenue and position itself for eventual recovery.

To that end, many owners and operators are turning to creative ways to keep their doors open in the belief that Gulf Coast properties will bounce back faster than in many parts of the country.

The figures are stark. For the first week of April, average occupancy nationwide and throughout Florida had fallen by 68%, according to Smith Travel Research (STR), a hospitality-focused research firm and a subsidiary of commercial real estate research giant CoStar Group.

Many properties’ occupancy – especially convention-oriented hotels that rely heavily on group and business meetings — now stands in the single digits. To reach break even, most hotels need to generate occupancy of 60% or more, says Kent Schwarz, an executive vice president with commercial real estate brokerage firm Colliers International who specializes in the hospitality industry.

Revenue per available room (RevPAR), a key lodging industry metric, plummeted even farther — by 81.6% year-over-year, STR reports.

The sudden downturn has resulted in massive layoffs, furloughs and partial property closures.

“It’s hair on fire time for the industry,” says Nick Plasencia, a managing director with The Plasencia Group, a Tampa-based hotel advisory firm with clients nationwide.

“For many, this is about as bad as it can get,” Plasencia adds. “It’s certainly worse that what happened in the aftermath of (the terrorist attacks of) 9/11.”

For now, Plasencia, Schwarz and others say they are advising hotel owners and operators to apply for any government assistance available; proactively reach out to lenders for loan forebearance; work with their brands to limit capital requirements and increase marketing; shutter amenities; and operate with skeleton crews.

Plasencia is advising clients in Florida, especially, to close down individual hotel floors, set air conditioning levels higher and lock entrances wherever possible, among other measures.

At Berkadia Hotels & Hospitality, a lodging brokerage and finance company, executives are advising hotels to think creatively by offering special deals for future business, including coupons costing $100 that can be traded in for $150 in future bookings or services, says Wyatt Krapf, a Berkadia senior director.

Advisors there also are advocating that owners and operators reach out to lenders to loosen up mortgage payments and seek bridge loans in some cases. Those same clients should also contact their brands to minimize or postpone capital improvement requirements stipulated in operating contracts.

“Some owners are asking lenders to convert their loans to interest-only for a time, while others are asking to be able to tap into (furniture, fixture and equipment) reserves, says Preston Reid, a Berkadia managing director in Tampa.

“Generally what we’re finding is that lenders that can be co-operative are,” he adds.

Plasencia agrees.

“Lenders are being overwhelmingly understanding at present,” he says. “In some cases they’re deferring mortgage payments anywhere from three to six months to alleviate the present cash-flow strain.”

Schwarz says the level of co-operation stems, in part, from lender reluctance to take possession of most hotels unless necessary.

“I don’t foresee a lot of lenders or special servicers taking back a lot of properties,” he says. “That’s because hotels have operating complexities associated with them, and they’re very labor intensive. Lenders don’t want to have to deal with an operating business like that.”

Instead, he expects loan modifications and extensions, or waivers on debt-service coverage ratios, to become the norm.

That may not hold true for hotels owing hundreds of millions of dollars in debt through commercial mortgage-backed securities (CMBS), however.

Over the next six months, CMBS loans on 14 Tampa-area and St. Petersburg-area hotels are set to mature, along with debt on six lodging properties in the Fort Myers area and one in Sarasota. Already, technical default rates on such loans tied to hotels nationally have leapt up to unprecedented levels.

“The CMBS market in Florida will be very interesting over the balance of the year,” Schwarz says.

New supply that isn’t already under construction and transaction volume almost certainly will be impacted for the balance of 2020, the experts say, and deals that are done will likely be underwritten with less debt.

Still, Gulf Coast hotels should fare better than most places when recovery does take hold thanks to its weather, predominance of leisure travel and many “drive-to” markets.

“The Gulf Coast has a leg up, certainly,” Plasencia says. “That’s because leisure travel tends to come back more quickly than any other type, and this area is well positioned for that with its many attractions and beaches. I think you’ll see a pretty steep uptick in occupancy rates in Florida and nationally when the tide turns with the virus.”

Krapf and Reid note, too, that future vacationers may not want to travel by airplane to Europe or other locales, but that pent-up demand will push them to seek closer destinations.

“Clearly I think we’ll see a lot of pent-up demand to get out of the house,” Krapf says. “And I think that the family that normally might have headed to Europe for a summer trip will now pivot to the Keys or another Florida beach.”

Schwarz concurs, and expects business travel will be the last to rebound as companies become increasingly accustomed to video conferencing.

“I think it’ll be some time before 5,000 or 10,000 people feel comfortable being crammed together in a convention-type setting,” he says.

New hotels, too, will be long in coming now, as lenders and underwriters wait to see how much, or whether, demand picks back up.

At least one major new hotel in Tampa is moving forward, however, despite the pandemic.

The 26-story JW Marriott, under construction now in the $3 billion Water Street Tampa development in downtown Tampa, is slated to open before the end of the year.

“Booking are strong there,” says Chris Adkins, the director of sales and marketing at the nearby Tampa Marriott Waterside, which is also a part of Water Street Tampa. “We have several groups booking now for December.”