Analysis

'New Normal' Is Elusive For Hotels Amid Pandemic, Attys Say

By Joyce Hanson
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Law360 (September 10, 2020, 4:24 PM EDT) -- Six months into the COVID-19 pandemic, hospitality lawyers report clients continue to struggle against civic shutdown orders along with a massive drop in business and leisure travel, as the growing popularity of online meetings adds to fears about the industry's future.

Hotel room occupancy lingers at troubling lows as those who previously traveled regularly for business get comfortable using online platforms such as Zoom, according to attorneys who say they're busier than ever advising clients on debt woes, transactions in a changing market climate and coronavirus-related suits.

"Despite being six months in, we can't yet determine how the hospitality industry will change and grow from here and what the new normal will look like," said Joshua Bernstein, the New York-based co-chair of Akerman LLP's hospitality sector team.

"It's an open question how much business travel will resume once the pandemic is behind us and whether people prefer Zoom and Skype meetings instead of traveling," he added. "In terms of leisure, it's likely to rebound once the epidemic conditions warrant, but a lot of the hospitality industry is focused on business travel."

In the lead-up to the Labor Day weekend, the American Hotel and Lodging Association reported that only 14% of hotel rooms were booked for the holiday compared with 41% a year ago. Nationwide, five out of 10 hotel rooms sit empty, "which is below the threshold at which most hotels can break even and pay debt," and occupancy is just 38% in urban markets, according to the AHLA.

And four out of 10 hotel employees are still not working, the association said. The hospitality and leisure industry lost 7.5 million jobs at the pandemic's peak, when nine in 10 hotels laid off or furloughed workers, and the industry is still down about 4 million jobs, it said.

"The real concern is not so much the shutdown orders, but the lack of business travel, conferences and conventions," Chip Rogers, president and CEO of the American Hotel and Lodging Association, told Law360. "This is normally the time hotels are sustained with profits throughout the year. Hotels are making very little money now. The employee staffing levels correspond with occupancy levels, and because the occupancy levels and rates have dropped so much, we're looking at an industrywide unemployment rate of 40%."

Dana Kravetz, a Los Angeles-based managing partner at Michelman & Robinson LLP whose practice focuses primarily on labor and employment, said he has been counseling hotel clients in the past six months on California WARN Act protections during mass layoffs, worker furloughs, health and retirement benefits, and reintegration of a workforce as properties reopen.

"It's been a very busy time for a labor and employment lawyer, for sure," Kravetz said. "A lot of properties have closed down. Some were by ordinance and some by choice."

To stave off proposed class actions by laid-off employees, Kravetz says he spends a lot of time guiding hotels and restaurants on how to talk to potential plaintiffs' lawyers.

"They're being very open about the conditions of these properties, sharing financial information that gives a clear indication of what the occupancy dropoffs have been," Kravetz said. "We've orchestrated settlements of claims based on when the businesses will open up and bookings increase. We're keeping plaintiffs' lawyers informed because it's very real."

The AHLA doesn't know how many hotels have permanently closed their doors, but closures are indeed happening, Rogers said. In New York City alone, he said, a number of hotels have shut down. They include the Hilton Times Square, the W New York Downtown, Marriott International Inc.'s Times Square Edition and the Omni Berkshire Place near Rockefeller Center.

Asked what the "new normal" was starting to look like, Rogers said he didn't think the industry has reached that point yet.

"The industry may take a decade to get to where we were," he said. "The first type of hotel that will close will be large urban center hotels. Those are valuable pieces of real estate, and people in cities are leaving in droves."

Click to view interactive version


AHLA Report: https://www.ahla.com/sites/default/files/State%20of%20the%20Industry.pdf

Repurposing of hotels as other types of commercial real estate will certainly happen, but that transition will take time, according to Rogers. He said he knows of a Boston hotel now being used as a local university's dormitory to accommodate safe-distanced living space for students, but added that the repurposing of hotels as office space has been slow because office leasing is also slowing down.

A Large Foreclosure Crisis Looms

These permanent shutdowns and repurposings come as the industry faces a historic wave of foreclosures caused by the pandemic. Hotels have been hit more heavily than any other sector in the commercial mortgage-backed securities market, with hotel CMBS loan delinquencies at their highest percentage on record, according to real estate analysis firm Trepp LLC.

Fully $20.6 billion in hotel CMBS loans were 30 or more days delinquent as of July, compared with $1.15 billion as of December, and loans that are 30 or more days delinquent stand at 23.4% as of July, versus 1.3% at the end of 2019, according to Trepp.

While some lenders granted short-term deferments on loans at the start of the pandemic, what comes next doesn't look good for many hoteliers in foreclosure who are still waiting for guests to return.

The AHLA report on occupancy tells the story of an industry in crisis, according to Bernstein, who said it shows how leisure travel in a typical year tapers off after Labor Day, while business travel continues to lend support after the holiday. But this year, business travelers just aren't coming back in great numbers, he said.

"A tremendous number of hotels are struggling to meet debt service," Bernstein said. "We're on the verge of what may be a large foreclosure crisis in the hotel industry. At the beginning of the crisis, lenders took a wait-and-see approach with owners, but that appears to be ending."

Cash on the Sidelines

Sandra Kellman, a Chicago-based DLA Piper partner and global co-chair of the law firm's hospitality and leisure practice, said that within that greater story, every hotel has its own tale to tell and recovery projections differ. Some hotels will recover sooner and some will never recover, she said.

For example, Kellman noted, extended-stay hotels and hotels near Walt Disney World Resort are likely to recover sooner than large hotels that depend on business from convention centers and other big events — but even so, each venue is different.

"We've got a big urban convention center hotel client that is doing well," Kellman said. "I know the ownership very well. They are creative and determined and looking at every penny with very intense management."

As for financing, most banks aren't lending yet because they're not confident about hotels' revenue projections, she said, adding that alternative lending sources such as life insurance companies and high-net worth individuals are stepping up comparatively more to buy properties or help hotels restructure debt in default.

"The smart money is finding the niches in mergers and acquisitions," Kellman said. "One deal we're working on is a luxury five-star hotel for an organization that has cash and isn't worried about getting a loan. They're buying it at a third less of its market value before COVID. A smart investor will be able to pick up a great hotel at a good price. There's a lot of cash on the sidelines."

Another Chicago-based hospitality lawyer, Larry Eppley of Sheppard Mullin Richter & Hampton LLP, who leads his firm's hospitality team, also said there's no shortage of money in the market. The sticking point is "price discovery," he said, meaning the back-and-forth process of bids and asks that happens before buyers and sellers reach agreement on a dollar figure.

During the uncertainty of the pandemic, that process has slowed, Eppley said.

"There are some transactions, but volume is definitely down," he said. "Sellers are holding out. If a buyer says you're worth 30% less, the seller is saying, 'I'm not so sure about that.' For now, there's plenty of money looking to invest. Liquidity is not really the issue the way it was an issue in the Great Recession" of 2007 to 2009.

Uncertainty around the pandemic is also leading to lawsuits, according to Eppley, who predicts that the earlier sense of "we're all in it together" will end among hotel owners, operators, brands and employees as more disputes arise.

"We're starting to get involved in management company disputes of owners versus operators, where owners are looking to get out from being underneath certain obligations," he said.

One striking instance of an owner-manager dispute related to the coronavirus arose in July, when real estate investment trust Service Properties Trust, which owns a diverse portfolio that includes hotels, sent a notice of default and termination to InterContinental Hotels Group PLC. IHG had failed to pay the REIT $8.4 million required by operating agreements covering 103 hotels around the U.S., Canada and Puerto Rico, according to Service Properties Trust, which gave IHG 30 days to avoid termination of the agreements.

By August, however, the hotel operator owed $26.4 million for failure to pay minimum rents and returns it owed the REIT, and Service Properties Trust announced on Aug. 25 that it was making good on its threat to transition management and branding of all 103 hotels from IHG to Sonesta International Hotels Corp. Service Properties Trust has a 34% ownership stake in Sonesta.

'Litigation Has Been Very, Very Busy'

In contrast, many hospitality lawyers have been doing quite well during the pandemic, saying they're advising clients on matters such as foreclosure litigation, hotel tenant payment disputes and business interruption lawsuits in addition to owner-operator suits.

"Business has been good and we are doing very well," Bernstein said, predicting there will be even more foreclosure litigation in the days to come. "For me, litigation has been very, very busy. I'm as busy as I've ever been, if not busier."

Meanwhile, hotel owners and operators are working with their lawyers on how to address two crises: the health crisis and the economic crisis, according to Samantha Ahuja, a shareholder at Greenberg Traurig LLP in the Washington, D.C., area whose practice focuses on hotel acquisitions and sales, operations and finance.

Greenberg Traurig's guidance for health and safety addresses physical distancing requirements, creation of new protocols, reinvention of existing spaces within hotels and a rethink of guest amenities. As for financial impacts, the firm is advising hotel clients on risk mitigation, liquidity challenges and negotiations with lenders and third-party or brand managers.

"Generally, those in urban properties are often struggling more than those in resort properties," Ahuja said. "Urban areas may face greater restrictions such as health orders on occupancy, and many business travelers are nervous about going to conferences and corporate events, compared with vacationers who can just drive to a beach and enjoy open spaces."

The initial panic that caused the shutdown of hotel operations and major staff layoffs has passed, and owners and developers are now deciding what action they'll take in the next 90 days following the Labor Day holiday, Ahuja said. Looking further ahead, she said there's an understanding that a resolution to the crisis won't appear in the next six to nine months.

But people in the industry are confident that hospitality will bounce back, Ahuja said, pointing to some hotels that are making the transition from focusing on corporate travelers to offering more services for families on vacation who want reliable WiFi for remote work and home schooling assistance.

Seeking the Hotel of Tomorrow

This summer, Kellman said, she joined The Gettys Group for a futuristic workshop series called The Hotel of Tomorrow, which sought input from hundreds of brands, designers, suppliers, owners and operators on hospitality innovations that will bring guests back in the era of COVID-19.

Ideas that cropped up at the workshops included better use of outdoor space, robotic butlers and bartenders, guest rooms with engineered fabrics that clean the air, and branded vehicles called Hotel Rovers that would safely transport guests from one hotel to the next on a self-driving adventure that offers room service and other amenities.

"If I knew what the new normal will look like, I'd be rich," Kellman said. "There will be so many changes that it's hard to foresee, and there have already been changes in operations about what to do with cleaning and room service and events."

--Editing by Philip Shea and Nicole Bleier.

For a reprint of this article, please contact reprints@law360.com.

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