‘Tsunami’ of hotel closures is coming, experts warn
LOS ANGELES — Located on one of the world’s most expensive strips of commercial real estate, the upscale Luxe Rodeo Drive hotel has closed, a casualty of a pandemic that is likely to put more hotels out of business.
The 86-room hotel, which for 27 years shared a city block with such high-end outlets as Cartier and Harry Winston, notified its workers last week that it would permanently cease operations because of the financial effects of the COVID-19 crisis.
“Please accept my sincerest gratitude for your service and loyalty and know that this decision was not made lightly,” Efrem Harkham, the chief executive of Luxe Hotels, which owns or operates three other hotels in Los Angeles and New York, told workers in a letter.
The Luxe Rodeo Drive is the first high-end hotel in the Los Angeles area to go out of business because of the pandemic, and industry experts point to an unusually high loan delinquency rate among hotel borrowers as a sign that more closures are likely to follow.
“We know there is a tsunami outside. We know it’s going to hit the beach. We just don’t know when,” said Donald Wise, a commercial real estate expert and co-founder and senior managing director at Turnbull Capital Group.
The steep decline in tourism and business travel has devastated the hotel industry.
“We anticipate many hotels won’t survive,” said Heather Rozman, executive director of the Hotel Assn. of Los Angeles. “Industry data shows 1 in 4 properties already are struggling to pay mortgages, risking foreclosure.”
Aron Harkham, president of Luxe Hotels and son of Efrem Harkham, said in an email that the Rodeo Drive location “got caught up with the bad timing of the global travel market” by launching a full remodel just before the pandemic struck.
Given the drop in demand for hotel rooms, he said Luxe Hotels is now considering “alternative options” for the property, which is owned by the Harkham family under a limited partnership.
High-end hotels have also closed in other parts of the country, including the 44-story Hilton Times Square hotel in New York City, which went out of business this month.
Ashford Hospitality recently turned over the keys to its newly purchased Embassy Suites in Midtown Manhattan to its lender after the real estate investment trust fell behind on debt payments, according to CNBC.
The owner of Chicago’s Palmer House Hilton hotel was sued by Wells Fargo last month, accused of defaulting on a $333.2-million loan. The lawsuit asks the court to appoint a receiver for hotel operations, according to the Chicago SunTimes.
Nationwide, it’s not clear how many hotels are behind on their loan payments. But figures are available on hotel loans that have been bundled and sold to investors as commercial mortgage-backed securities. Payments on 16.77% of those loans are more than 30 days late, according to Fitch Ratings — up dramatically from less than 2% before the industry began feeling the pandemic’s financial effects.
Once a hotel is more than 30 days late on making a mortgage payment, the lender can file a notice of default on the loan and increase the interest rate by 5% until the payments are brought current, according to hospitality industry experts. If after 90 days, the lender has not brought the loan current, the lender can file a notice of sale — a sale that can take place 21 days after the 90 days expire, experts say.
“The clock is ticking on loans for hotels and restaurants, and there is going to be a sharp uptick in delinquencies,” said Lloyd Greif, founder and chief executive of the investment banking firm Greif & Co.