It comes as no surprise to Trend Journal subscribers. Since the COVID War broke out in February, we have been forecasting that hotels, shopping malls, and urban storefronts would be hard hit by draconian lockdown rules and the media’s 24/7 selling COVID Fear & Hysteria.
Now, those sectors are losing market value by double digits.
Across the U.S., hotel occupancy rates averaged 33 percent during the three months ending 30 June, compared to 70 percent a year earlier, with average room rates dipping to $83 a night against $133 in 2019, according to real estate firm Cushman & Wakefield.
As a result, 738 hotels defaulted on loans that were bundled into securities with face values totaling $17 billion, data firm Trepp reported.
Hotels already are losing 20 to 30 percent of their value, said a report from brokerage firm Avison Young.
The hotel industry will begin to recover by the end of 2022, assuming that a COVID vaccine has been widely distributed, Stephen Michaels, Director of Cushman & Wakefield’s Hospitality Practice, told the Financial Times.
In the meantime, “a significant number of hotels will be converted to workforce housing or senior housing or some higher, better use,” Michaels said in a FT interview. “These will likely be older hotels with inefficient layouts and unionized labor structures.”
New York City alone could see about 6,800 hotel rooms converted to other uses, or about 20 percent of its total, a Cushman & Wakefield analysis found.
Among shopping malls and retail storefronts, “we will see dozens and dozens of loans go into default and lenders will only be able to recover about 30 cents on the dollar,” warned Manus Clancy, a Trepp Senior Director.
As with hotels, many of those mortgages have been bundled into securities because the loans are large, often topping $100 million, so the risk needs to be spread among a broad pool of investors.
As defaults pile up, private equity firms will take the brunt of the loss because they hold the riskiest parts of the bundles, Clancy said; hedge funds and money managers own the second level of risk. Pension funds and mutual funds should suffer less than during the Great Recession, he added, because “nobody is expecting the problems to reach that high.”
Malls in middle-class areas are likely to fare the worst, with some losing up to 80 percent of their value.
Malls that are no longer viable as shopping centers will become medical centers, technical colleges, housing complexes, or similar entities requiring large spaces; others will be torn down and the land sold, Clancy said.
Simon Property Group, the largest U.S. mall owner, is in discussions to turn vacant mall space into Amazon fulfillment centers, as the Trends Journal recently reported.
Storefronts in city centers are less likely to repurposed, Clancy expects, and probably will be bought cheaply and rented out at lower rates.
“The market may come back, but it will come back at a much lower price per square foot,” he predicted.
