COVID Kills Hospitality Industry, Crushes NYC Hotels, Triggers CMBS Implosion

The global hospitality industry is facing one of the worst crashes in history, and New York City, the epicenter of COVID-19 in the US, has seen its tourism industry decimated. With no rebound in sight, the second great depression for commercial real estate is ahead and could lead to a massive default wave of shopping malls and luxury hotels. 

Judging by the ongoing collapse in commercial real estate, as we recently noted, CMBX 6, which track 25 commercial-mortgage-backed securities with high exposure to 2012 shopping mall loans, has tumbled during lockdowns, resulting in a handsome payout for the likes of Carl Icahn, McNamara and others who were short the tranche. 

Last week we said, "keep a close eye on CMBX 9" with its "outlier exposure to hotels which have quickly emerged as the most impacted sector from the pandemic, this may well be the next big short." 

The various CMBX series are shown in the chart below, with CMBX 9 most notable for its 17% exposure to hotels. 

While the broader market has rebounded, CMBX 9 has experienced a swan dive. 

Several key observations in the Manhattan hotel industry have been seen this month, suggest the tide is turning for the industry. Let's start with the newest piece of information is that The Times Square Edition, a newly constructed multi-million dollar hotel located in Midtown Manhattan, is set to pull the plug on operations by late summer. 

Marriott International Inc. operates the hotel under the Edition brand, says it "has provided advance notice to employees, government officials and union officials" that all operations on the property will grind to a halt on August 13. 

This suggests Marriot doesn't see a V-shaped recovery in the tourism industry this year. Maybe Marriot is taking advice from Scott Minerd, the CIO of Guggenheim Investments, who recently said a recovery in the economy could take upwards of "four years."

Bloomberg reviewed new documents in the ongoing foreclosure proceeding show Marriot informed owner Maefield Development in March that "a cash shortfall due to the outbreak could put the developer in default on its contract with the lodging giant."

Moody's Investors Service valued the mixed-use property at more than $2.4 billion in 2018 -- considering the economic crash and commercial real estate implosion, the value of the property is likely much lower. 

Even when New York City reopens, hotels in Manhattan generally rely on international travel and large conferences, which are several things that may not return to 2019 activity trends for several years. This has made it challenging for hotel operators to cover debt payments and labor costs, suggesting defaults and closures could be dead ahead.

Jonathan Falik, CEO at JF Capital Advisors, recently told Bloomberg that too many rooms are empty in the city and warns not all hotels will survive.  

ReadNYC Hotel Loans Defaulting At Alarming Rate As Room-Rates Plunge, Tourism Tumbles

Last week, Sunstone Hotel Investors Inc. wrote down its Hilton Times Square hotel to less than its $77 million mortgage. Sunstone is currently in discussions with lenders to either restructure or handover the property.

Data firm Trepp said $1 billion dollars in late payments were seen in CMBSs used to finance New York hotels. The second great depression in commercial real estate has arrived, many shopping malls and hotels may not survive.