COVID-19 Creates Concerns For Originators of Commercial Mortgages

The announcement by Hilton of the closing of it Times Square hotel should not come as a surprise. It, along with other hotels in New York City, was having difficulty meeting debt obligations even before the COVID-19 pandemic struck. Hilton, which saw its debt-service-coverage ratio plummet before the pandemic, has been hit even harder as occupancy rates dropped because of the virus.

Financial concerns for other commercial properties

Hotels are not the only commercial properties feeling the effects of the coronavirus. An average decline of 27% in the value of commercial properties, including shopping malls and other properties catering to hospitality and retail businesses, caused holders of securities backed by mortgages on those properties to be concerned about the stability of their investments.

Efforts to contain virus affect commercial properties

Commercial properties used for hotels and retail businesses have suffered financial setbacks caused by measures implemented by state and local governments to contain COVID-19, including travel restrictions and shelter-in-place orders. Reports show that appraisals ordered by lenders holding mortgages on hotel properties around the country reflect a steep decline in property values ranging from 27% to 46%.

Potential for a bleak future

The announced closure of the Hilton in New York City may offer a glimpse of what the future holds in store for other commercial property owners as the worldwide pandemic continues. Lenders that relied upon commercial properties as collateral for loans made to the owners are now at risk as property values plummet.