The New Year Could Be the Hardest One Yet for the Hotel Industry
As the country grapples with the threat of the omicron variant, hopes of immediate relief and recovery for travel and related industries in the new year seem all but dashed.
It’s another especially brutal blow for the hospitality industry. For nearly two years now, hotels have been enduring a plunge in occupancy, particularly those relying on nearby destination locations and recreational hotspots for business. Most of them have survived so far, largely thanks to PPP and other sources of government funding.
But those businesses were bracing for a storm that might last a few months, and those rations of federal support are seemingly starting to dry up. As we enter our third pandemic year with a new variant and a sudden uptick in infection rates, it seems inevitable that things will soon come to a head.
I recently closed the sale on a flagged 200-room, full-service hotel in Orange County for $21.5 million as part of a Chapter 11 bankruptcy case. The hotel relied on its proximity to local theme parks for the bulk of its business, and while occupancies and operations improved with the initial reopening of the parks, they almost immediately started suffering again thanks to the labor shortage. You can’t run a full-service hotel if there’s no one left to service it.
You can find similar stories about hotels near destination locations like Beverly Hills, Las Vegas and Miami that are facing bankruptcy and forced sell. How long can we reasonably expect the rest will hold out, particularly as lenders’ patience starts to wear thin?
In the pandemic’s early months, lenders recognized the unwinnable situation these hotels were placed in and for the most part were willing to forebear and defer to allow them time to recover. At the same time, regulations requiring lenders to report impaired borrowers were suspended, relieving some pressure on lenders to deal with these troubled assets as they otherwise might have.
Apparently, no one sent COVID-19 the memo that these protections ended with the New Year. Lenders in 2022 will once again have major incentive to start playing hardball with “underperforming” borrowers, at a time where it’s clear the pandemic’s impact remains nearly at full effect.
Even hotels graced with best case scenarios—those that are close to business destinations or out in nature, for example—are facing significant debt thanks to the pandemic at this point. As lenders look to collect on what they’re owed, it’s going to take more than “a return to normal” for hotels to see their way out of their deficits.
Absent some external intervention, I expect many hotels will recognize Chapter 11 as a simpler solution to their problems. If these businesses are to survive, Congress needs to officially recognize that we’re not out of the woods yet and extend federal protections and financial support that are now expiring. Otherwise, the hotel industry as we know it will be a much less hospitable place by the time we finally put this pandemic behind us.
Robert “Bobby” Marticello is a founding partner of Smiley Wang‑Ekvall, LLP. He concentrates his practice on business bankruptcy matters and related litigation. Marticello represents virtually all parties in Chapter 11 bankruptcy cases and out-of-court restructurings, i.e., debtors, committees, secured and unsecured creditors, equity holders, trustees, asset purchasers and others.