Houston Hotel Logs Largest CMBS Loan Loss in March

The Houston lodging market took a significant hit as the Crowne Plaza Houston Galleria Area hotel resolved for a loss on a $28 million loan, the largest CMBS-backed property to resolve for a loss last month, according to Trepp.

The hotel went to auction in December 2022 and was sold last month, where it posted a loss of $24 million or nearly 86 percent of its pre-resolution balance. This indicates strain on the Houston lodging market due to slow recovery in the energy industry and a failure to regain its footing post-pandemic, said David Putro, head of commercial real estate analytics at Morningstar Credit Information & Analytics.

The Crowne Plaza Houston Galleria Area is the second largest hotel-centered loan to resolve for a loss so far this year after the Marriott Galleria in Houston resolved for a loss on a $29 million loan in January.

Cantor Commercial Real Estate originated the loan for the Crowne Plaza, a 207-key, full-service hotel at 7611 Katy Freeway, in 2014, after the property underwent a $20 million renovation two years prior. The loan was transferred to the special servicer, Torchlight Investors, in May 2020 due to the pandemic. The hotel’s most recent appraisal value in May 2022 was $26 million, 46 percent below its 2014 securitization appraisal value of $48 million. As of June 2021, the property became REO, meaning ownership was transferred via deed-in-lieu of foreclosure to an unspecified third-party.

“That loan was underwritten $2.9 million in net cash flow in 2014. And for 2019, the last year that we have numbers for pre-pandemic, that cash flow fell to $1.2 million … it was well below break-even before the pandemic hit,” Putro said.

Houston has more than $1 billion in total hospitality loans, with a delinquency rate of 43 percent, according to a March Trepp report. About one-third of Houston’s lodging properties experienced a decline in net cash flow growth as the average occupancy rate for the Bayou City sits at 53 percent. Nearly 70 percent of hotels in the metro also logged a debt service coverage ratio insufficient to cover debt services.

“Even prior to the pandemic, there was a lot of weakness in the Houston lodging market. Now, as you start factoring in recession fears or inflation, that’s probably going to put an additional damper,” Putro said. “If we were going to see the post-COVID bump, it would likely be manifesting itself already.”

One of the top loans currently on Morningstar’s watchlist is an $18 million CMBS loan for the Hampton Inn and Suites Houston Medical Center at 1715 Old Spanish Trail. The loan is being monitored after it logged a year-end 2021 net cash flow 50 percent less than it was when the loan was issued in 2015. The ratings agency also noted the debt service coverage ratio on the loan — which measures whether the borrower’s cash flow can pay off its loans — is below breakeven.

A $20 million CMBS loan on the Courtyard Houston Medical Center is also on Morningstar’s watchlist as it is expected to expire. The 10-year loan from London-based investment bank Barclays was issued in 2013. While the property has seen improvements over the last year, with occupancy increasing from 60 percent in 2021 to 65 percent last year, it still has a current balance of over $16 million coming due next month.

Tales of Houston’s flagging hospitality industry have been in circulation since 2017, when the credit-rating agency Kroll first reported Houston had more distressed loans tied to hotels than any other metro area. Since January 2020, 14 lodging loans have been resolved for a loss in Houston, totaling nearly $67 million in realized losses across the city.

Distress has significantly affected every market this year, and as delinquency on struggling properties backed by CMBS loans reverberates through the industries new issuances have plummeted to their lowest levels since 2012. Total issuances last quarter totaled less than $6 billion, indicating a 79 percent decline from the first quarter of 2022.