After hotel owners saw sharp drops in room demand and revenue throughout 2020, many who had property loans suspended debt service and interest payments. This impacted loans backing commercial mortgage-backed securities in an unprecedented way and hotel loan delinquency numbers shot up sharply between May and July 2020. Prior to 2020, the delinquency rate stood at well below 2% but then spiked in July 2020 to over 10 times that percentage.
Since then, many owners and lenders have worked diligently to get delinquent loans performing again and the delinquency rate has declined markedly through this October to just below 10%.
Taking the performance over the past 12 months as a guide, it is not unreasonable to assume that the CMBS delinquency rate will continue to decline, though returning to delinquency rates under 2% is probably still quite a few quarters off.
In the three years prior to 2020, average monthly delinquency dollar volume stood at $1.6 billion. This amount increased to just under $20 billion in mid-2020 but has since deceased again to just over $8.6 billion. The number of 30- and 60-day delinquent loans has decreased to more of a typical ratio of below 10% of all delinquent loans. That contrasts with May 2020, when 89% of the delinquent loans were between 30 and 60 days past due.
The data seems to suggest that owners and lenders sought a quick resolution for 30- and 60-day delinquencies, which are now as rare as they were in the past. For some delinquent CMBS loans, it is possible that a hotel associated with the loan is still closed and it is in no party’s interest to foreclose since carrying costs, even of a closed hotel, can be substantial.
It is likely that the ongoing demand recovery, especially for resort hotels and leisure-oriented full-service hotels, will spur improvements in CMBS delinquency rates. Those types of properties disproportionately benefited from the return of the American leisure vacationer, supported by accumulated vacation days and savings.
Business transient and group demand has not yet returned in any noteworthy scale, but hotel operators hope that spring 2022 will bring improvements. The return of demand and revenue will either force owners to take on new equity to cure the outstanding interest payments or force the hands of special servicers and result in lenders taking ownership of the hotel.
These lending market forces, be they internal operational improvements or external foreclosures, will continue to result in a decline in the number of delinquencies. The question now is simply how fast that trend will occur.