NYC's Struggling Hotel Industry Gears Up for a Revival
NYC's hotel industry faced a pandemic-induced slump, but a robust resurgence is on the horizon.
NYC Hotel Market Rebounds Thanks to Tourism, New Restrictions
Source: WSJ / Gansevoort Meatpacking Hotel.
New York City's hotel industry experienced a severe downturn during the pandemic, with tourist numbers dwindling and several hotels shutting down. However, there's a strong resurgence on the horizon for the Big Apple's hospitality sector.
Rapid recovery: Hotel room rates in the city averaged $260 per night in August, a 17% increase compared to the same month in 2019, and the highest rate for August since 2008. The rapid recovery has been fueled by a surge in tourism and the city's endless demand for rooms to accommodate newcomers.
Supply and demand: The city's hotel supply is anticipated to remain relatively static due to restrictions on new hotel development. Furthermore, new limitations on Airbnb rentals are expected to uplift the hotel business by curbing the supply of short-term rentals. These changes could lead to an increase in hotel room revenue by up to $380 million in 2024, levels not seen since the 2008 financial crisis.
Tourists and business travel: The pandemic led to a decline in tourism in major cities like New York. Yet, NYC expects nearly 63.3 million tourist and business visits this year, close to 2019's record 66.6 million. This number is predicted to exceed 2019 figures next year due to domestic and international leisure demand. Gross operating profit per available room increased by 8.4% through July 2021 from pre-pandemic rates. While corporate bookings remain slow, a surge in leisure travel, notably from Western Europe, is boosting NYC's recovery.
➥ THE TAKEAWAY
If you can book it there: NYC's hotel market faces supply constraints due to restricted new development, closures of certain hotels, and a decrease in short-term rental listings. These constraints, combined with rising demand from tourism and other factors, are boosting room rates above pre-pandemic levels. Hotel owners anticipate increasing revenue in coming years, while experts anticipate significant room rate growth for an extended period of time.
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Tides Equities Reports Extensions And Workouts For Dozens of Loans
Tides Equities' Sean Kia and Ryan Andrade (Tides Equities)
After a challenging summer, LA-based multifamily firm Tides Equities, led by Ryan Andrade and Sean Kia, has successfully negotiated workouts on numerous loans, extending their maturity dates and reducing floating-rate debt interest.
In the nick of time: The firm urgently needed these loan modifications due to rising debt payments, spurred by the Federal Reserve's increased interest rates. Coupled with slow rent revenue growth in the Sun Belt and Southwest regions, Tides found itself under financial strain. By late August, mortgages worth nearly $1 billion across 27 Tides complexes had been watchlisted, largely because of inadequate cash flow to cover debt, according to Trepp and Morningstar.
Averting potential foreclosures:: Kia and Andrade revealed that the maturity dates for these loans would be extended by two to four years. This move aims to ward off potential foreclosures, granting Tides the time to finalize renovations and boost rents. With the majority of Tides' loans set to mature soon, this strategy also hinges on hopes of declining interest rates, allowing for refinancing at more beneficial rates.
Rate cap relief: Tides has also managed to secure discounted rates on several deals. Sponsors with floating-rate loans are required to purchase rate caps to protect against potential interest rate hikes. By obtaining 6-month rate caps instead of 12-month terms, Tides has the option to buy new caps at a potentially cheaper rate if interest rates decrease in the interim. Additionally, the firm has negotiated longer-term rate caps at discounted rates, effectively stabilizing loan rates for up to three years and mitigating the impact of rising rates.
➥ THE TAKEAWAY
Grinding it out: Although Tides Equities appears to be navigating its financial challenges strategically, there's a cloud of uncertainty regarding future interest rates. Some view the firm's approach as a temporary fix, "extend and pretend", while others hint at an "endure until 2025" strategy, anticipating favorable rates then. The true test will be the company's ability to meet rent growth expectations, especially given the plateauing rents in areas like the Sun Belt.
📖 Read: $5.65B in CRE loans have been modified with an extension, with the largest share being 1–12-month term increases, according to Trepp.
▶️ Watch: Marathon Asset Management is planning to bid on Signature Bank’s $33B CRE portfolio, compromised mostly of NYC multifamily properties.
🎧 Listen: Bryan Wroten and Katie Burke of Hotel News Now report on San Francisco's slow return to offices and hotels due to tech company downsizing, reduced business travel, and a negative public image.
Banks Tighten Lending Amid Regulatory Forecast, Shaking CRE Landscape
Commercial real estate is grappling with a twofold dilemma: tightening bank loans and potential regulatory shifts in liquidity. This combined effect, intensified by rising interest rates, is dampening the flow of loan funds to the industry.
Banks' defensive stance: According to a recent Fed survey, a significant 60-70% of senior loan officers from 85 banks have tightened lending protocols across all CRE categories. The capital access for CRE transactions now faces its toughest period since the Global Financial Crisis. Alarmingly, half of the survey participants anticipate even more stringent lending criteria in the coming months.
Borrowers in the spotlight: Both existing and aspiring borrowers undergo meticulous evaluations concerning their future loan-servicing capabilities. This heightened vigilance by banks has notably curtailed CRE deal activities, reflecting a 50% drop compared to the previous year.
Offices bear the brunt: The office sector is feeling a pronounced squeeze from the stricter lending conditions. Escalating debt costs for office spaces, fueled by the current interest rate milieu and a diminishing lender pool, have taken a toll. Recent years have witnessed a marked devaluation in office assets, with numerous loans depreciating post-origination.
A window for alternative lenders: With traditional banks adopting a conservative stance, alternative lenders see a silver lining. Closed-end funds, having amassed record capital reserves, stand ready to invest in adjusted assets. Moreover, insurance-backed lenders are marking a discernible uptick in activity, especially in areas where debt yields of low-leverage, stabilized CRE assets have surged.
➥ THE TAKEAWAY
Banking at a crossroads: Beyond the tightening of lending norms, the CRE sector faces the prospect of regulatory reforms. Proposals have been made to compel banks with assets over $100B to augment their reserves. While these regulations aren't enacted yet, many banks are already preparing for their potential implications. Such shifts could lead to bank consolidations, particularly among smaller banks, influencing the unique, localized loans they offer. Furthermore, these challenging bank lending conditions may prolong the difficulties for borrowers trying to refinance their loans in the coming years.
Building bridges: Salesforce (CRM) is hiring 3,300 people in various roles after laying off 10% of its workforce.
Expanding territory: Berman Enterprises expands into 3rd-party leasing and investment sales with the launch of BermanCRE, hiring a DC-area broker to lead multifamily investment sales.
Follow the lawyers: Morgan Stanley (MS) was sued for $750M by private equity firms alleging fraud in the Brightline agreement.
Student loan squeeze: Student loan repayments are set to resume in the US, adding about $275 in expenses for millions of borrowers.
SFR silver lining: High prices, high down payments, and mortgage rates over 7% make it tough for first-time homebuyers in the US.
Office market blues: Boston's office market faces challenges, with One Liberty Square selling for $45M, 17% less than a decade ago, while Class B spaces are 30% vacant.
Multifamily mayhem: Repercussions of early pandemic stimulus measures by the Fed are causing trouble in the multifamily sector. Total multifamily debt at risk stands at $436B.
Builders behind bars: Construction company owners Salvatore Caravella Jr. and Zeki Donuk pleaded guilty to tax crimes, facing maximum sentences of 5 years in prison.
Plymouth Profits: Plymouth Industrial REIT (PLYM) sells a 306.6KSF industrial building in Chicago for $19.9M, netting $13.9M to pay down debt and support development.
Holiday hiring blitz: Amazon (AMZN) is hiring 250K employees in the US for the holiday season, with hourly wages ranging from $17–$28.
The stickiest states: Texas is the "stickiest" state in the US, with approximately 82% of native Texans still living there in 2021.
Going green: The HUD's Green Retrofit and Renovation Program (GRRP) will fund the renovation of 23K properties with project-based HUD rental assistance contracts, focusing on utility efficiency.
Downtown commitment: Menashe Properties deepens its commitment to downtown Portland by acquiring the American Bank Building for $13.6M.
Worth its weight: Brookfield Properties (BPYPP) buys 40 acres of land in Rialto, CA, for $72M near a Target distribution center and Amazon fulfillment center.
Pension powerhouses: CalPERS, the largest US pension fund with $463B in assets, has invested $1.85B in two CRE debt funds.
Two years ago, brokerages thrived with high transaction volumes, increasing rents and values, and low interest rates, amassing record cash reserves. However, the scenario has flipped. Major firms like CBRE, JLL, and Colliers once had close to $8 billion in reserves, but dwindling cash flows and rising borrowing costs have reduced this to $3.8 billion.
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