Third Wave of Hotel CRE Defaults Has Started, Triggered by CMBS Maturities and Variable-Rate Mortgages

CMBS holders are on the hook, not banks. Investors in hotel REITs have gotten totally crushed.

By Wolf Richter for WOLF STREET.

The financialization of everything has let to a convoluted setup for hotels and their beaten-up investors at all levels. It goes something like this: The hotel properties are held by a publicly traded hotel REIT that leveraged them up with variable-rate interest-only mortgages during the era of ultra-low interest rates, that were then securitized into commercial mortgage-backed securities (CMBS) and, backed by overinflated property valuations, sold to institutional investors, such as pension funds and bond funds. The hotels themselves are operated by other companies, usually partnering in some way with a hotel brand, such as Marriott.

When the Fed hiked its policy rates, the variable rates of those mortgages – pegged to short-term interest rates, such as Libor – jumped, and so mortgage payments roughly doubled in a year, while hotel property valuations plunged back to earth.

So the hotel REITs have now started to walk away from the properties. They take a total loss on their equity. The CMBS holders take the remaining losses when they sell the properties, with the proceeds not anywhere near enough to cover the loan balance. The companies that operate the hotels continue to do so, and guests might not know the difference.

For CMBS holders, this has been a nasty deal for years. During the Great Recession, defaults topped out at 19%, according to Trepp, which tracks and analyzes CMBS. That was the first wave. During the early months of the pandemic, the default rate topped out at 24%; but in that second wave, as hotels reopened, many defaults were cured.

So now we have the beginning of a third wave of defaults in 15 years, this one driven by soaring interest rates, and property owners walking away instead of trying to work out a deal, as they’d often done during the pandemic.

In June, the default rate of lodging CMBS jumped to 5.3% – worse even than the default rate of office mortgages.

The latest was Ashford Hospitality Trust, a hotel REIT headquartered in Dallas. It said on Friday that it intends to walk away from 19 hotel properties in cities across the US.

The mortgages of the 19 hotels are in three mortgage pools that had an initial maturity date in June but could be extended. To extend the loans, the REIT would have to pay down the balance by $255 million.

Those three mortgage pools are part of six mortgage pools, with a combined balance of $982 million, that matured in June. The company decided to make the down-payments totaling $129 million on the other three pools to extend loans for the 15 hotels in those pools.

The interest rate of the three mortgage pools that it intends to walk away from has jumped to 8.8%, and the 19 hotels “were not covering debt service,” the company said.

By walking away, the company will save the $255 million down-payment plus it will save $80 million in capital expenditures at these hotels through 2025, it said.

It tried to sell two of these mortgage pools but did not receive any bids above the loan balances.

“This is a prudent economic decision that reflects a comprehensive capital management process by the Company, which explored and assessed multiple options for these assets including refinancing, extensions, and potential asset sales,” it said, thereby handing the losses to the CMBS holders.

Ashford Trust’s shares [AHT] have completely imploded. To stay above $1, the shares have undergone two 1-for-10 reverse stocks splits, one in 2020 the next in 2021 (whereby 1,000 shares became 10 shares). Shares have collapsed by 99.6% from the reverse-splits-adjusted peak in 2014 of $1,040, to today’s share price of $4.03 (data via YCharts):

Ashford Trust is externally managed by Ashford Inc. [AINC], which was spun off from Ashford Trust in 2014, at the peak of Ashford Trust’s share price. Ashford Inc’s shares have collapsed by 94% from the peak after the spinoff, to $9.56 today. Both of these stocks are shining heroes in my pantheon of Imploded Stocks:

The 19 hotels that Ashford Trust is walking away from are in these cities:

  • Columbus, IN (Courtyard)
  • Scottsdale, AZ (Courtyard)
  • Phoenix, AZ (Residence Inn)
  • Flagstaff, AZ (Embassy Suites)
  • Las Vegas, NV (Residence Inn)
  • Plano, TX (Courtyard)
  • Plano, TX (Residence Inn)
  • Plymouth Meeting, PA (SpringHill Suites)
  • Basking Ridge, NJ (Courtyard)
  • Bridgewater, NJ (Marriott)
  • Newark, CA (Residence Inn)
  • Newark, CA (Courtyard)
  • Hawthorne, CA (SpringHill Suites)
  • Oakland, CA (Courtyard)
  • Hawthorne, CA (TownePlace Suites)
  • Walnut Creek, CA (Embassy Suites)
  • Durham, NC (Marriott)
  • Atlanta, GA (W)
  • Baltimore Airport, MD (SpringHill Suites)

Another big hotel REIT walked away in June.

Hilton-spinoff Park Hotels and Resorts [PK], whose shares have collapsed by over 50% from their spinoff price and by 60% from the peak, made the headlines in June when it walked away from a variable-rate interest-only mortgage of $725 million, backed by two large hotels in San Francisco. With those two hotels gone, Park Hotel is down to 44 hotels properties, from 67 hotels at the time of its spinoff, having gotten rid of 23 properties.

Management of that REIT tried to pull a bag over their investors’ heads with a moronic clickbait line about San Francisco, instead of admitting that they’d grossly mismanaged the company, failed to invest in needed updates, and grossly overleveraged the properties. They should have apologized for having screwed investors in PK. A company that treats its investors that way gets downgraded from a “sell” to a “should have sold a long time ago.” And then, to top it off, they screwed the CMBS holders (such as pension funds and bond funds) by walking away from the properties. I lambasted them and the media coverage of their clickbait sleight-of-hand here.

However hotel-property owners may try to color their situation, what we are watching unfold is the revenge of variable-rate commercial debts in an overleveraged corporate world.

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  121 comments for “Third Wave of Hotel CRE Defaults Has Started, Triggered by CMBS Maturities and Variable-Rate Mortgages

  1. Hubberts Curve says:

    To add to the Hotel’s problems the Hotel workers in Southern California just cranked up a big strike against a large group of hotels. Can’t say I blame them given the cost of living in So Cal but it won’t help pay these new mortgage bills.

    • Wolf Richter says:

      Yes, but they’re working for the hotel operators, not the hotel property owners.

      • BENW says:

        Wow! The “W” hotel in ATL. That’s a pretty swanky joint.


        • Eric says:

          They’re all pretty swanky compared to Best Western.
          Is this the mid-tier between BW and Hilton that is getting slammed?

        • joedidee says:

          Hilton is taking its $$$, while CMBS gets bill after bill
          with NO END IN SIGHT
          big losses = YOU BET

    • Tom says:

      Most of the public hospitality REITs have fixed rate debt. Also PK gave the keys back on the San Francisco hotels as an obviously wise decision. Resort hotels are doing well. Other Class A refurbished hotels are coming back.
      Point is good time to buy at half of replacement cost.

    • NBay says:

      First sentence let>led…although it could be the link between financialization and convolution….

      As one of the Rockerfellers told Bucky Fuller;

      Why make business simple, when you can make it complicated?

      • NBay says:

        I thought only VERY BAD IMMORAL people sent jingle mail (and bulldozed 100’s of newly constructed houses)…..just a sound byte I’ve heard a lot, especially after GFC.

        • NBay says:

          And dumped a few thousand brand new Hondas in the ocean off Seattle. I had one for several years (YES! I am a true HONDISTA!!!) and with a buddy we had lots of spare parts (cut 3-4 of them up at his house, marveled at clever Japanese engineering, too).
          It’s what we should all be driving now (updated, of course), but STILL in the SIR Alex Issagonis size and format.

          And as electrics….WOW!
          Almost too much fun!!!!….kids would die for sure…..but lots do anyway doing kid stuff….I was very lucky.

        • Mike G says:

          And dumped a few thousand brand new Hondas in the ocean off Seattle.

          WTF? When did this happen? Are you talking about a shipping accident or something deliberate?

        • Jack says:

          “And dumped a few thousand brand new Hondas in the ocean off Seattle”

          Did not happen according to chatgpt:

          I’m sorry but I couldn’t find any information about brand new Hondas being dumped in the ocean off Seattle. However, I found that between 1946 and 1970, more than 55,000 containers of radioactive wastes were dumped at three ocean sites in the Pacific Ocean

    • leanFIRE_Queen says:

      Without affordable housing, those areas will sink into a death spiral.
      What matters is for the young to get out so they don’t get hit by lack of affordable housing. Let the old handle it.

  2. Thomas Curtis says:

    Thanks Wolf!

    I don’t understand this interest rate stuff but it’s nice to have a sense of it.

    I try for safe companies and dividends and it seems money may be coming out of the tech rally and going into hard commodities and energy. Anybody have any idea what that could mean for the economy and the broader market if it continues?

    • Arizona Slim says:

      It means that people are more interested in investing in companies that actually provide something useful while they make money.

      • Thomas Curtis says:

        I certainly am.

        I am not sure on the possible sector rotation though because the dollar has dropped almost 2% in 2 weeks according to the futures chart at finviz which would make oil more expensive.

        I swear, I am in the last third of my life and I am more ignorant than ever…!

        • VintageVNvet says:

          Don’t feel lonely re your last paragraph TC:
          Currently at last 10%, if that, and it certainly seems to me that the older I get, the more I realize how very little I know.
          Almost makes me wish to be young and know everything again,,, but only almost…LOL
          OTOH, Wolf does his best to educate us re actual facts of ”economy, finance, and MONEY”
          the rest is up to us, eh

        • Thomas Curtis says:


          Supposedly realizing how little you know is a sign of wisdom but it doesn’t feel good!

          But, I have enough sense to stay away from stuff I don’t understand.

        • Bobber says:

          If you assume ethics and morals mean nothing, and you start thinking about how people can scam the most out of society, while doing the least work, everything that happened over the past 20 years makes sense.

          The most lucrative question has been, how can I take advantage of a slow, short-sighted, illogical, impractical, and incompetent government that prints and distributes trillions of free money?

        • eg says:

          Thomas Curtis, knowing that you don’t know is the beginning of wisdom.

        • NBay says:

          Would that then become a known unknown or an unknown unknown?
          Someone said it matters….one of the Bush2 drinking buddies, I think.

      • dang says:

        I don’t think that’s it all. The article said that a financialization scheme was unwinding as a result of the interest rate doubling on highly leveraged real estate companies with variable rate mortgages.

        In the face of falling demand.

        The solution: jingle mail.

        • NBay says:

          Yeah. :)

        • NBay says:

          Re Providing Something Useful:

          I hear surface temps around FL are up to 95 degrees F in places.
          So they can all save on their utility bills and bathe at the beach.

          Also checked with NOAA……unfortunately, it’s true. They have a good article on how this was a special June, too, among other noteworthy things.

          Worth reading!

  3. Timothy J McLean says:

    Wolf, as always you are spot on. You and most of your readers will enjoy this book, “These Are the Plunderers” by Gretchen Morgenson. It’s a well written tale of how PE continues to screw workers and investors. Of note PE now owns a substantial amount of assets in the hospital space. If anyone thinks patient care is top of mind, please read this book.

    • Ervin says:

      Her book on the real estate crash of 2008 was awesome .

    • TK says:

      Good book indeed. So is “Plunder” by Brendan Ballou. I understood the latter much better. The scenario above is abundant in healthcare. All players are insulated from liability and debt, except the operator who doesn’t have any assets. I am avoiding investments that have a PE exposure. KKRs Envision recently went bankrupt. It’s hard to follow because all the terms are not public. But the bondholders lost and the Envision business, which had no real estate, was sold to another KKR fund cheap. So hard to follow since those bonds get sold off with pooled tranches. I bet my Vanguard mutual fund probably had some.

    • BS ini says:

      As a PE employee I can testify how Natural Gas Partners is definitely in the camp of NGP first and enployees and unsuspecting stock and bond holders second. I left a great oil company to join an NGP company a spin-off of their investments with the understanding that as they built up value they would continue to sell to the company they created Memorial Resource Development. Instead a subsidiary MEMP was created and took on massive debt then spun away from NGP who unloaded their interests in both MRD and MEMP. Memp was bankrupt in a couple of years (still hanging on as Amplify Energy). The whole thing was a joke I left after less than 1 year when my average tenure was 15 years with companies. Leaving at 58 never good for one’s career but i learned about the shenanigans of PE behind the scenes.

    • Flea says:

      Try the price of money,great insight where we are in the 100 year cycle .bye bye

    • Chuck G says:

      No PE in this story…

    • old school says:

      As Warren Buffet says “private equity” is a not an accurate term. They are usually using debt and not equity to buy firms.

      I found it interesting that Buffet paid $3 billion for the LNG terminal from Dominion who wanted the proceeds to pay down existing company debt. Maybe it marks the start of some bargains as over leveraged people need to lower their debt servicing.

  4. Sams says:

    Wulture capitalism at its best. Take the money and walk away. It is the one way capitalism destroy itself.

  5. Motorcycle John says:

    I love telling people who complain about their taxes that what they pay doesn’t even cover the painted stripes on the freeway they drive on. Similar to “were not covering debt service,” Did the capitol generated from the mortgages get dumped back into the properties? The term “Zombie Company” for me was finally comprehended when I was having a quick Wendy’s lunch that turned into an hour on the phone. This restaurant was freshly remodeled no expense spared. While I was there in the heart of the lunch rush It hit me, I have only seen 4 or 5 people come in and order? As a businessman I immediately figured out what Zombie means! I would not be happy as an owner if I was able to take home all the money in the register with out any overhead. The lunch ring was something in the area $100. How in the world can you survive or even pay for one of these brand new chairs? Oh I see more debt and more debt then walk away.

    • random guy 62 says:

      Sounds like the KFC in my town. Their standalone store was extremely slow (my estimation) so they closed the place down. Eventually it got opened by Dominoes with a full remodel… all to be slow again.

      A few years later a new KFC pops up a half mile down the road, closer to the interstate. This time instead of a standalone building, it’s in a strip mall instead, as one of four tenants. One of the other four is…pizza hut – another yum brand.

      I haven’t dug too deep, but would bet $5 this is a real estate play. They’re primarily banking on leasing out the other two units to some other sucker to pay the bills. The other two units are still empty after nearly two years. Hardly anyone visits that strip mall at lunch time. The KFC recently had to shut down entirely for lack of employees. There are a lot of great local eateries and few decent chains nearby.

      What a waste of resources and manpower. The whole thing feels like it is enabled by low interest rates.

      • Lili Von Schtupp says:

        KFCs are franchises. If they are anything like Subway, the financial impact has been mostly dumped on the franchise owner while the parent company lets as many franchises open nearby as they can sell. I agree the company at large must be suffering, but not as bad as the franchise owners.

        Used to know a KFC franchisee on the early 00’s. She was miserable, constantly complaining she could barely make ends meet and looked 20 years older than her age from the stress. And she bought into a high traffic area.

        • Random guy 62 says:

          Yup, mostly franchised but not all. Went down the rabbit hole out of curiosity. The building is owned by a large franchisee spanning 7 states operating 4 restaurant concepts. Two of them are KFC and Pizza Hut. Tax address is 850 miles away.

    • Flea says:

      As song goes u,u,u ain’t seen nothing yet

    • denisesail says:

      McDonalds, KFC need to be more like McDonalds European Model. You have the order kiosks but the interior is nicer than US with more family service dinning size tables. Big touch screens for the kids to play games. A better and more extensive menu with more choices. The McCafe is more for dessert than breakfast. Nice desserts and of course expresso and American coffee served on real china. The surprising item is you can substitute a beer for a soft drink. The US business model is all drive through because store interiors are old and dirty. A lot more small towns would enjoy with a better menu and more upscale burgers and chicken sandwiches. Even the fish was cooked more like the fish in fish and chips. We went for the grands! It has been a more pleasant surprise.

    • Lynn says:

      Sometimes I wonder if some larger empty businesses are the equivalent of the restaurant chain Los Pollos Hermanos. Like Bed Bath and Beyond for instance. I mean, these are franchises and the local owner still has to pay employees vendors etc. They do this for years and years and years.

      I’ve walked into some empty businesses and the person behind the counter was surprised and not happy that someone was walking in. There is one Mexican supply store in particular that never has customers and feels like you could easily just disappear there. There is a layer of dust on every item in the store. Creepy. Never going back there, only went in because they had a good cast iron tortilla maker.

  6. Paul says:

    I’m curious why the hotel valuations have dropped so much. Is it a mismatch, with these hotels built for business travel and not in the right locations to cash in on the drunken sailor consumer travel spending?

    • Tage Tracy says:

      A quick crash course in valuing commercial real estate (including hotels). Generally speaking, commercial real estate is valued by taking the property’s operating income and dividing it by a cap rate. The cap rate is a target rate of return the owner wants to achieve and is very sensitive to interest rates (especially the 10 yr treasury). Seeing that interest rates have increased significantly over the past 2 years, let’s review a quick case study in valuing a hotel.

      Pre-pandemic operating income (i.e., gross revenue less direct operating costs) assumed to be $1 million. Apply a cap rate of 6% (10 year treasury of 2% plus 4 points) and the estimated value would be $16.67 million ($1 million divided by .06).

      Today operating income assumed to be $800k (e.g., a property in San Francisco that has lost customers via its location, WFH business travelers, etc.). Apply a cap rate of 8% (10 year treasury of 4% plus 4 points, which is a very kind estimate) and the estimated value would be $10 million ($800k divided by .08).

      Just like that, $6.7 million of value was wiped out or roughly 40% of the pre-pandemic value. To add salt to an open wound, if the owner had borrowed 70% of the original value of $16.7 million (and made interest only payments), the loan would be $11.7 million, well above the current value of the property (and supporting a default).

      This is a very simple example as most valuation analyzes are more complex but the concept is simple. Decreasing operating income combined with increasing cap rates (driven by increasing interest rates) spell disaster for over-leveraged an poorly managed properties. Throw on top of this higher interest payments (as variable interest rates have increased) and its not too difficult to see how these types of properties get into real trouble, very fast.

      Hope this helps.

      • Jorge says:

        Thank you for educating me, Tage. Much appreciated.

      • Volvo P-1800 says:

        Excellent comment. Thank you!

      • Sit23 says:

        The valuer gives the value that their client wants. He who pays the piper calls the tune.

      • HowNow says:

        Thanks!! Very helpful.

      • joe2 says:

        My landlord in college in Boston was a physicist who could not find a job and did sweat equity on old Back Bay townhouses. He was doing pretty good. His rule was 20% return on cash investment. So you could back calculate a purchase plus build-out price. I learned a lot from him. Just goes to show the practical application of a good education. I think the total resourcefulness of a modern education is: get a government job or handout.

        • NBay says:

          I gotta meditate on that partial sentence before the colon, before I make my final decision on that one.

      • cresus says:

        Excellent. Thank you.

      • Nemo300BLK says:

        Thank you

    • Flea says:

      Over leveraged over priced labor inflation rising taxes and insurance,higher utilities higher maintenance.

    • Lauren says:

      I can only speak for the Marriott in Durham, NC. It’s right in the middle of downtown and is among the best locations in the city. However, there’s two other hotels just around the corner that are nicer and less dated.

      • Petunia says:

        Looking at the list my thoughts were, who goes to Baltimore? And why build a residence hotel in Las Vegas?

        Two glaring red flags for any investor.

        • Kenn says:

          Not red flags.
          Baltimore airport is south of the city and supports all the northern and eastern DC suburbs, and all of Baltimore, which actually has lots of people and industries. It’s a rather large and busy airport.
          Las Vegas, Residence Inn hotels are not for tourists, but primarily for people working there for a couple of weeks or months. With the amount of construction and expansion going on there, a Residence Inn makes a lot of sense.
          The problem isn’t the hotels, but the massive debt piled on these properties.

  7. Enlightened Libertarian says:

    Wolf, would a 10 for 1 reverse split mean 1,000 share would turn into 100 shares?
    Not 10 shares [100 to one split]?
    Or am I not understanding the article?

    • Wolf Richter says:

      Like I said, there were two reverse stocks splits. 2020 and 2021

      #1: 1000 shares to 100 shares

      #2: 100 shares to 10 shares.

      • Enlightened Libertarian says:

        A Ha, I was right!
        I didn’t understand the article.
        Now I see what you were saying, thanks very much.

        • Tony (one of them) says:

          you were lucky there you didn’t get the famed RTGD… rebuttal!

        • NBay says:

          Nah. He claimed known reading comprehension problems beforehand, and then was delighted he knows himself so well. Enlightened, ya know?

  8. Doctor_ECE_Prof says:

    These things should have happened during the pandemic itself. They wasted public money by propping them up first and then gave them time to sell to individauls and pensions funds chasing yield due to ZIRP.

    • Wolf Richter says:

      Yes, there’s that angle too. Same with junk bonds and leveraged loans. Now there’s a lot more work to do to get through all this.

    • Cas127 says:

      I think I vaguely recall that Ashford was one of the PPP bad actors who had to be shamed into returning its PPP loan.

      • HowNow says:

        Shame has no place in Capitalism. C. is amoral, something that Adam Smith really didn’t grasp, even though he was a moral philosopher first, and, indirectly, an economist, second.

      • David in Texas says:

        Cas127, you are correct. “Villain or victim: How Dallas hotelier Monty Bennett became PPP’s face of corporate greed.”

        This is behind a paywall, unfortunately.

        • NBay says:

          The one in the Bible isn’t blocked, but I don’t know what book it’s in….Old Testament, somewhere.

          Jubillee year!…..everyone who screwed someone out of too much something had to give it all back at the 49 year reset. The priests knew some people were just too damn greedy. And they made all the rules.

          Crude, but still regulated capitalism…..good stuff for all.
          We lost it somewhere along the line.

          It’s why I like Constitutional Max Net Wealth…..I paid attention in Bible school.

  9. Cas127 says:

    One upside on idled hotels/motels…they are a helluva lot easier convert into apartments (see 25% rent hikes) than malls, office buildings, etc.

  10. cresus says:

    Lots of hotels in Manhattan have simply never reopened. A large swath on Lexington midtown, the 4 seasons on 57th, the plaza athenee and likely others, but those are near me. Beautiful properties: empty. Tourists no longer have chemical restrictions to enter the US, but it doesn’t feel like there’s a lot of them. Someone’s holding the bag.

    • Wolf Richter says:

      Vacation rentals are huge problem for hotels. They’re everyone. This is competition hotels weren’t ready for.

      It may be that lodging needs to be converted into residential since residential has been converted into lodging 🤣🥂 We made it full circle, yeah!

      • cresus says:

        I hear a lot of empty offices being thought off as residential. I’m sure it’s possible but I assume not easy. And pretty bland architecture.
        Abnb is forbidden in many buildings but yes, added competition. Cycles of things. I have a hotel 1 block away from my terrace so I can see. It’s not a hyperluxurious thing but a solid 4 stars around 300-400/night. Most night it’s very sparsely occupied. That’s my thermometer. Anecdotal I know but still.

      • Anon2017 says:

        Vacation rentals? Are you referring to AirBnB type rentals? I have been using them since 2015. On my most recent trip SFO-YYZ and return, the plane was quite full each way with American tourists visiting the Toronto area and Canadian tourists visiting the SFO area.

      • Lynn says:

        It’s already happening with motels in many rural areas. Of the 7 motels near me 3 of them are now pretty much all long term residents and 2 are 50% or more long term residents.

    • Mike G says:

      Factors for international tourists (of which NYC has quite a few ) – the dollar is fairly strong against the Yen and Euro, the Chinese are still staying home, horrible press about gun violence has scared off others.
      The Four Seasons NY is owned by Ty Warner who is currently in a dispute with Four Seasons over management fees at this property and his Four Seasons Biltmore in Santa Barbara. He has inexplicably kept the resort shuttered since March 2020 which must be costing him about $1m a week in lost revenue.

      • Petunia says:

        I don’t know about these particular properties, but NYC hotels in general are now full of homeless and illegal immigrants. You can read all about it in the NY papers. Not safe places for tourist anymore, if ever.

        • cresus says:

          I own a house there , in midtown, a penthouse. So I can see and do not need a newspaper when I can knock on the door. Homelessness is actually much better than last year. They must have shipped some somewhere else. As for illegals they are in very selected hotels, predemolition, not mixed with tourists. Methink Petunia has no clue. NY is NY and can be dangerous for the naive and unexperienced. Like any other big city. I also own a penthouse in Rio de Janeiro and one in Paris and a mansion in the midwest. NY is the safest. I love them all.

        • elbowwilham says:

          “NY is the safest…” Lol, good one. You are either a troll, or a trust fund kid with fulltime security.

        • Sams says:

          #elbowwilham. I have been in Rio long time ago and Paris more recently, but newer in NYC. Still I expect all of them to be more or less safe, or at the same level. The dangers may differ, but all in all, all are «safe» to a tourist taking caution.

        • Seba says:

          ” You can read all about it in the NY papers. Not safe places for tourist anymore, if ever.”

          Can’t speak for NY but I’ve read similar things about Seattle over the last few years, it sounds just as bad when you talk to the locals online.. then I went and had a great MLB All-Star trip, hotels were packed and prices in the stratosphere so I stayed in a very budget oriented motel (it was actually quite crap and sketchy looking and overpriced) and used public transit, something I’ve not done in years. I’m safe and sound home now, all I can say is be careful how much you trust popular media, sensationalizing everything is big bucks and it seems everything in the US is hyper partisan now on top as well.

        • Petunia says:


          If you own a penthouse in NYC you definitely want to paint a pretty picture to protect your investment. We are native New Yorkers and our families are bailing out, we left first. The last ones bailed out of Long Island this year to South Carolina.

        • Lynn says:

          Of the 3 motels with long term residency in my rural western town(s) 2 of them are kept up and housing people like construction workers etc. The other one and one of the ones with 50% long term are basically housing the homeless.

  11. Hubberts Curve says:


    After reading this article I went back to my you tube home page where I normally just watch machine tool videos and right at the top was a video titled ” Every Hotel in San Franciso is Closing”. I didn’t want to give the poster any clicks or encouragement because I figured it was trash.

    • Wolf Richter says:

      That kind of stuff is just hilarious. Put “San Francisco” in the headline plus something stupid, and it becomes clickbait. Not even the hotels that Park Hotels walked away from are closing.

      • Jiml says:

        The separation between operators and property owners is one way the economy has become more efficient and yet more resilient the past few decades. Originally the separation was just financial engineering, a way to make balance sheets look better, but it has actually worked to add a bit of resiliency as well.

        Now, property owners can do all sorts of crazy financial shenanigans and when it blows up in their face they lose the property without hurting the local economy. The property stays open. Local bars and restaurants around the property are not hurt because the hotel closes.

  12. AV8R says:

    Cue the Market Rally!!!

  13. Desert Dweller says:

    If so many hotels are defaulting, why does the corporate media keep telling us travel is up and the economy is doing great?

    • Broke Student says:

      Spending on flights are up though, probably just means the defaulting hotel properties aren’t in typical vacation spots.

    • gametv says:

      I just noticed that Southwest airlines stock is shooting higher at an amazing pace. Seems like this is a set-up for another crash. I think we are seeing falling travel, or at least people reducing the cost of their travel.

      Seems like consumer discretionary stocks are rising at an amazingly fast pace at the very time when consumers are going to put the checkbook away.

    • Wolf Richter says:

      Travel IS doing great!!! Record airport traffic, Record attendance at National Parks, people going overseas, etc.

      This is about companies that own the real estate and about interest rates. Not the hotel operators. You’ve got to distinguish that.

      In addition, hotels have to compete with vacation rentals that are now everywhere in huge numbers. Every Tom, Dick, and Harry has gotten into them as an investment.

      • Bs ini says:

        The short term rental market has to be having a large effect on the hotel business. The internet and ease of access to properties is at the touch of one’s phone vs hotel bookings. For the vacation spots and business events. Vacation area’s probably have a larger negative impact because one can pick a home with a view on the lake etc vs a hotel where the views may be limited .

      • rodolfo says:

        Yeah the operators in general should be doing great with what I see as room rate increases of 20% or more where I shop from pre pandemic. Rodeway inn quality inn lower priced anyway.
        The very very very extended Patel family may see some good hotel property bargains upgrading to courtyards Marriott etc.

    • KGC says:

      The AZ hotels on the list are vacation destinations, as is the LV one. The CA hotels are all Bay Area locations, and the W in Atlanta is a convention hotel. As noted the operators will probably continue to operate, but the amenities are going to wear out faster with fewer planned upgrades.

      There’s a not a huge profit margin in running a hotel, and with online booking and discounts every room is a hard sell, especially when business travel is down.

    • Mike G says:

      Hotel rates have skyrocketed in my mostly-tourist area since Covid reopening and lately are close to sold out every weekend. Looking at most of the properties specified hints they are business hotels, which are presumably suffering as part of the remote-work trend.

  14. Bricks says:

    Wolf – A little quibble with the headline that this is a result of variable rate loans. The vast majority of CMBS loans are fixed rate rather than variable. In fact, one of the huge burdens that they have are defeasance clauses that until last year were a big penalty to pay off except within a narrow window near maturity. I believe that these hotel loans were fixed, then they matured and went to a variable rate as they were negotiating an extension. The lender wanted the loan rebalanced because the new rate would be higher and the borrower refused.

    The problem is the same and the market to refinance commercial real estate loans is super slow, the few loans that are getting done are very conservative.

    It looks to me like a pretty big wave, banks as well as CMBS, are coming due. Construction loans are typically just a couple of years and then the lender expects the developer to get a new permanent loan. An awful lot of apartment developers are shopping for new permanent loans now with interest rates 2x what they were when they started construction.

    • Robert Hughes says:

      Thanks for comments.
      It is my understanding const loans are as you state typically 1 to 2 years depending upon project size. I always heard variable rate, with interest accruing and to be paid at the end from the final take out loan? With construction costs going up strongly and interest also and with take out loans becoming harder to get and for lower amounts based upon appraisals / proformas, it is my understand many a project is in deep trouble. Do you have further comments?

      • Bricks says:

        Yes, typically 1 to 2 years, sometimes with an option to extend on “normalized” terms, i.e. cash flow coverage covenant and amortization schedule. Not always variable, but many are. We just paid off a 3.15 fixed rate deal due to a sale. Interest reserve is a common feature. Keep in mind that the loan is sized based on loan to cost, so with a conservative lender the borrowers equity is already in the deal. For example, I borrow 70% of the cost and fund 30% in equity. When things get hot the loan to cost can skyrocket, for a rate. That same deal we just paid off that was taken out 14 months ago we could have borrowed 100% of cost for 10.5%.

        These are the kinds of construction loans that are in big trouble first; high leverage and high rates. Variable or not. We are getting the proforma cash flow for those deals we started a year + ago, but the value of that cash flow is less at these interest rates. When the loan comes due is when the fun begins.

    • Wolf Richter says:


      Every CMBS loan that defaulted that I discussed in this article and in prior CRE articles had a variable rate. Every single one of them. Ashford was clear about that too. The interest rates on the loans here backed by the 19 hotels had risen to 8.8% — as I pointed out in the article. All you have to do is read the article, instead of just the headline.

      • Bricks says:

        You do excellent work. I read your entire article and also read the company update and checked one of the loan agreements regarding their interest rates.

        The point is that maturities are accelerating the problems, all the maturing loans, whether they have an interest rate cap prior to maturity, or not, will be forced to rebalance for current rates.

  15. Rico says:

    And this is happening when air travel is through the roof and Illinois just set a tourist record ?

    • Kernburn says:

      It’s like the summer of 2005. Consumers are spending like there is literally no tomorrow.

      • ru82 says:

        A retired relative of mine e in his early 60s was about to look for a job 3 months ago because the stock market in 2022 went down. Now with inflation calm and his 401k retirement fund is going up again, he tabled the job idea and is traveling a bunch. Mexico City, Las Vegas, LA, and New York. LOL

        There is a fund in my 401k that is up 35% YTD 2023. Big growth fund.

        Wealth Effect.

        • Einhal says:

          And that’s exactly why inflation will pick back up. People feeling emboldened by their asset values are driving inflation. It’s that simple.

    • grimp says:

      Illinois and tourism? Who goes to Illinois for vacation?

      • tom15 says:

        Uhaul fleet being returned to waiting customers.

      • anon says:

        grimp +1000

        Not me.

        I LEAVE Illinois for vacations.

        Though, truth be told, there are some awesome museums in Chicago. And some great ‘nature centers’ in the surrounding counties.

  16. Seba says:

    Just curious, who are the CMBS holders selling their properties to? Someone is buying if they continue to operate.

    Either way my travel and vacation budget is almost completely crushed now with the cost of everything, maybe these Meta workers making 300K a year or whatever can do it but I’m done for the year, maybe longer. My salary simply can not keep up anymore.

    • mol says:

      Ya gotta van camp! Drive a minivan, which is useful anyways. Tint the rear windows to 5 %, get a small car top carrier for dirty laundry, a compact butane stove plus carbon monoxide detector, then wool blankets and a bang stick- don’t keep the bang stick chambered. Plenty of room for 2 to stretch out in back, while saving $100+ per night. Plus you tend to be able to stay closer to what you are visiting and you can nap easily during long drives.

      • mol says:

        Shower at truck stops on the interstate, or use a solar shower bag in the wilderness.

  17. Matthew Scott says:

    So who get rich and who gets screwed in this scenario? And is there any sound argument that this is how a society should be run?

  18. Frank says:

    How can they just walk away w/o declaring bankruptcy? Could they not be sued for whatever they have the ability to pay? Of course they could not pay what is owed but they have assets (that they are preserving by walking away).

    • Bricks says:

      “Non Recourse” is a standard for these loans, it is an asset loan and priced that way. The only guaranty provided is typically for “bad boy” acts, such as fraud as well as environmental acts. (you won’t pollute the property) Most CMBS loan documents have a clause that is a springing guarantee – if the borrower declares BK, then their are financial guarantees beyond the borrowing entity. Virtually no one tests this.

  19. dang says:

    The commentariat seems sanguine concerning the future economic system, as if it’s going to suck. At the same time, the government has engineered an economy on stimulants, promising that it may be possible to increase your wage and benefit compensation as a clerk in a 7-11 to a family level.

    The financial bubbles that the Federal policies created haven’t collapsed. Quite the contrary, they have been reinflated.

  20. Gary Fredrickson says:

    Maybe something is missing, but the lodging CMBS default rate doesn’t seem to be impressive. From the graph the 2008/2009 event took about 9 months (crude measure) to get up to 15% that still isn’t very impressive. These recession people get worked up at a measly 2 or 3% GDP, whining all the way to the Federal Reserve help us, help us. If that CMBS default rate was at least a third (33%) then maybe it would mean something, but 5% probably has some bank or government program that a sophisticated investor could click on a phone app from his yacht to get covered.

  21. SocalJimObjects says:

    What’s a couple of billion dollars when the Dow is going to 900K. Heck with the later, the US itself can go bankrupt and it will not matter one bit!!!

  22. Earl says:

    My knowledge of real estate/CMBS is small, but the distress in hotel REITs resembles at least superficially the stresses in the skilled nursing/nursing home industry. A home near me has changed hands three times in the last four years. First it was “Heartland” part of the HCR Manorcare network chain, then it was ProMedica, northwest Ohio’s biggest employer that acquired 147 homes from Manorcare and now it is Optalis a burgeoning local chain headed by the chief of IT security of a major accounting firm. Seems this industry too is over financialized. There are nursing home REITs.

  23. anon says:

    By the way … if you are at all interested in Architecture – especially ‘mid-century modern’ – Columbus Indiana is a great place to visit.

    There are a number of wonderful buildings in Columbus designed by many famous architects.

  24. nicko2 says:

    Bank of Canada raises rates. ::::chef kiss::::

  25. danf51 says:

    It seems to me that the story of our economy/civilization today is the flight from ownership. These hotel operations are structured so that nobody actually has an ownership role in the operation.

    The great criticism of the Soviet model was that nobody owned anything so nobody cared. It’s effectively the same deal in America today.

    Even large corporations are not owned. They are controlled. Shares that are claimed to represent ownership are owned by other corporations whose shares are owned by other corporations. Real ownership is so dilute that it really hardly exists.

    One can look at the difference ownership make by comparing Boeing to SpaceX. Owners are driven to do something, create, achieve, realize some vision – profits are a means to an end. A non-owned enterprise like Boeing only exists to make profits. The profits are the end. They could just as well be making toilet paper as space craft. In fact much of the management of Boeing probably know more about TP than space craft.

  26. rusell1200 says:

    We have (Raleigh NC area) some hotels (boring boxes) that look like they are reaching substantial completion.

    These would be under the original construction loan which would be interest only?

    So when they are finished, what are they likely to do loan-wise? If the operator has already done their lease agreement with the real estate owner, I presume they are still stuck?

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