Analysis

Hotels Face Uneven Odds Of Surviving The Pandemic

By Andrew McIntyre
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Law360 (April 23, 2021, 11:46 AM EDT) -- The COVID-19 pandemic has put a major strain on hotels as occupancy levels have been low for more than a year, and experts say that as the vaccine rolls out and leisure travel picks up, not every hotel will bounce back.

The pandemic has cast a light on the difference between large conference center hotels and smaller properties, and has also underscored the important distinction between driving and flying to hotels. Those and other factors will determine the fate of various U.S. properties, experts say.

And while many hotels will not reopen, some are likely to be repurposed for residential use, according to experts.

Here, Law360 looks at the road ahead for the hotel sector.

Some Properties Will Permanently Close While Some Will Be Repurposed

For some hotel owners, a year of low or no occupancy coupled with the burden of mortgage payments has been the nail in the coffin leading them to realize they can't reopen. Lawyers say owners in that situation have several options.

"There's no question that in some markets, New York being high on this list, many hotels are not expected to ever reopen. That's already started," said Robert Ivanhoe, vice chair of Greenberg Traurig LLP. "Many owners have said, 'We're never reopening the hotel. We're just looking to do some sort of adaptive reuse or sell it to somebody who will.'"

Ivanhoe noted that 100 to 150 hotels in New York alone may never reopen.

"That's a lot of hotel rooms that will come out of the market. It could be more. How much more … will depend on how strong the recovery is," Ivanhoe said.

As far as repurposing goes, Andy Robins, co-chair of the hospitality practice at Akerman LLP, said it isn't prevalent at the moment but he expects it to pick up.

"There are a lot of hotels that were essentially obsolete before COVID and that is the place where I think you're going to see a lot of … adaptive reuse," Robins said. "We haven't seen a ton of it, but I believe it's coming."

Senior living is a likely candidate for adaptive reuse, but hotel rooms could also be converted to apartments or condos, he said.

In some cases, a wall could be torn down between two hotel rooms to create a larger residential condo or apartment unit.

"The likely changes to that kind of property are to take a series of floors and either make … condominiums or rentals. Maybe double up the hotel rooms. A double bay unit that has 700 square feet. In New York, that is not so tiny," Robins said.

Another approach would be to convert some units at a hotel to timeshare status, and work with a timeshare operator.

Properties in "Drive-To" Markets Are Primed for a Rebound

Hotel investors have long been bullish on large trophy assets in U.S. coastal markets that are often reached by air travel, but given restrictions on international travel and a renewed interest in car travel among domestic guests, properties in so-called drive-to markets are likely to see more of a rebound this year, experts say.

"Anything that involves local resort travel is going to go gangbusters," said Brooks Clark, a shareholder at Polsinelli PC.

Clark said Florida in particular is rushing to get hotels back online in preparation for the summer, but noted that properties across the country are also gearing up for an anticipated busy summer as the vaccine rolls out.

"If you're that resort on Lake George that used to cater to middle- or later-age people, you're getting people this summer," Clark said, pointing to Cape May, New Jersey, as another hot booking spot.

Many of the properties primed for upticks in occupancy are outside of the nation's largest cities, and many are in drive-to markets. Many are also on freeways, which are convenient for guests looking to arrive by car, said Jim Butler, chairman of the global hospitality group at Jeffer Mangels Butler & Mitchell LLP.

Certain coastal markets, though, are also seeing upticks in occupancy, particularly if they are resort destinations and are easily accessible by car.

"You can't get into Santa Barbara or Laguna [Beach]" in California, Butler said. "They're booked."

The Road Ahead Remains Long

While experts are hopeful for a recovery in the hotel sector in 2021 as the vaccine rolls out and more people make plans to travel, experts warn it will likely take years for the sector to get back to where it was in 2019.

"Hopefully our worst days in the hotel industry are behind us, but I still think we're a good ways away from 2019 levels in many respects," Greenberg's Ivanhoe said. "I think owners and lenders are beginning to see some light at the end of the tunnel, but it's still pretty far away. There's still a need for more patience in order to get to the point where we're on the other side."

"It's not going to be until 2024 or 2025 where you will see performance get back to where we were in 2019," Ivanhoe added.

While leisure travel is expected to pick up in 2021, it's unclear how much of a rebound business travel will see, and for hotels that rely heavily on business travelers, the road to recovery will be longer, and is less clear, lawyers say.

"Urban hotels that get business from business users are expected to really show some signs of weakness over the next six months," Robins said. "I do think that the business-oriented [hotels have] six difficult months to get through. We'll see what the banks are willing to do."

And those hotels that rely on business travelers may have to retool or close their doors permanently, depending on what the new normal for business travel becomes.

"Urban center hotels, they are dead in the water," Butler said. "Unless they are adequately capitalized or unless they are lucky, … it will be a long long haul and they will continue to slide down the slopes of the canyon into the deep abyss," Butler added.

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