Hotel loans that have been packaged as commercial mortgage-backed securities, or CMBS, typically give borrowers the option to extend the loan beyond the stipulated due date by an additional year or two. Facing the suddenly elevated interest rate environment that occurred last year, many borrowers holding loans that came due in 2022 exercised extensions if they had the option to do so.
According to CoStar Risk Analytics, $23 billion hotel CMBS loans scheduled to mature prior to 2023 were still outstanding as of December 2022. Of those, 79% were pushed to 2023, 11% had either been placed with a special servicer or were set to be paid off by end of 2022, the remaining loans were extended to a time after 2024. A large majority, around 80%, of the loans that were extended into 2023 were originally due in 2020 and 2021 and are still being worked out.
Because most of the original CMBS loans were made at interest rates well below the current rate environment, borrowers with maturing loans that need to be refinanced are facing drastically higher interest payments, which would present a major financial hardship for many hotel owners. That is especially the case for urban hotels that cater primarily to transient corporate guests, where revenues have not yet recovered to pre-pandemic levels. The combination of reduced revenue and much-higher interest rate expenses likely results in many hotel properties no longer being financially viable for the current owner.
Many borrowers in that situation are holding out hope that the current rate increases by the Federal Reserve take hold, the economy slows sufficiently to appease the Fed and by the end of the year, interest rates decrease, making refinancing a more-viable alternative.
Exercised extension options have shifted the loan maturity of over $10 billion in hotel-backed CMBS loans to 2023 from prior years. It is not yet clear if this increase will lead to a larger amount of distressed loans going into default and becoming available to opportunistic investors this year, or if the extension bought borrowers the time they needed to get their loans refinanced at rates they can afford.