Significant hotel sector performance deterioration as a result of the coronavirus pandemic and recession make the assignment of ratings to new US commercial mortgage-backed securities (CMBS) single-asset single-borrower (SASB) hotel transactions unlikely at this time, Fitch Ratings says. The duration of the pandemic is uncertain, which limits the visibility of short-term performance and precludes the assignment of Stable Outlooks. Fitch discusses hotel sector pressures in its latest report New Ratings Unlikely for U.S. Single-Borrower Hotel CMBS due to Coronavirus-Related Volatility.
A sustainable recovery in the lodging sector depends on the return of demand from all three major demand sectors: leisure, business travel, and group/conference business. Hotel performance is expected to lag the economic recovery as the longer-term effects of the recession and unemployment will continue to weigh on travel decisions even after restrictions are eased and social distancing is no longer necessary. Fitch currently maintains Rating Watch Negatives (RWNs) on all classes of rated SASB hotel transactions.
Fitch expects the economy to begin to recover in the months ahead with a return to fourth-quarter 2019 GDP levels in 2.5 years, provided stringent lockdown restrictions are avoided. However, as noted in our Global Economic Outlook: June 2020 – Coronavirus Disruption Easing, risk of renewed lockdowns due to virus resurgence is high, and this would delay full economic recovery until 2025.
The pace of hotel revenue declines since the onset of the pandemic is unprecedented. Through June 2020, US hotel RevPAR, on a TTM basis for hotels that are open, is down 22.1% since February and 21.7% for the same time last year, according to STR, Inc. This exceeds the peak-to-trough RevPAR decline observed of approximately 18.7% from May 2008 to May 2010 during the Great Recession.
We anticipate that US RevPAR will drop by more than 45% in 2020 and then partially recover in 2021 to 80% of prior cycle peak levels, assuming economic conditions are consistent with our Global Economic Outlook. From there we assume a 7% per annum recovery pace, slightly lower than the average of the prior two downturns, reflecting the prospect for lingering economic and coronavirus-related disruptions. Under our base case scenario, TTM RevPAR will recover to its prior cycle peak in nominal terms in 61 months, compared with 59 months following the financial crisis and 49 months after the Sept. 11, 2001 terrorist attacks.
In addition to dramatically reduced demand, the lodging sector is also pressured by new supply. A significant number of hotels were in the planning stages or already under construction prior to the pandemic. These hotels may be completed and ready to open as the economy recovers, compounding weak occupancy rates as demand will likely not be sufficient to absorb the added supply. New hotels under construction are expected to lead to a 4.3% increase in new guestrooms above existing inventory. By comparison, average annual new guestrooms as a percent of existing supply was 1.9% from 2014-2019. Luxury hotels have the highest proportion of new supply with more than 15,000 guestrooms under construction or roughly 18% of existing inventory. Conversely, there are only 3,586 guestrooms being built in the economy segment, or 0.5% of current supply.