Brought down by the lockdown

By early March, Terminal 1 of John F. Kennedy Airport, one of the busiest airports in the country, was nearly a ghost town.

The novel coronavirus was sweeping East Asia and spreading around the world, and the terminal — which serves departures for China Eastern Airlines, Air China, Korean Air and Japan Airlines — had taken a huge hit since carriers began suspending flights to Asia in February. Retailers there reportedly saw sales fall by 50 percent in just a few weeks.

JFK’s Terminal 1 was New York City’s “patient zero” for the impact of coronavirus on the travel and retail sectors less than a month ago. But the contagion has since spread quickly and broadly, devastating hotels, restaurants, entire shopping corridors and malls. Now, desperate hotel owners are filling empty rooms with overflow hospital patients, and already struggling shops in Soho are boarding up their storefronts like an abandoned rural downtown.

In a telling convergence of how the pandemic is walloping hotels and retail, on March 13 the International Council of Shopping Centers canceled its annual conference slated for late May in Las Vegas.

That was just one of hundreds of conferences and events canceled as the fear of contagion spread even faster than the virus itself. Many mall operators canceled all public events, and major retailers began shutting their doors even before mandatory closures left most stores no choice. By mid-March, trade groups for retailers and hoteliers — who were already facing strong economic headwinds — were appealing for multibillion-dollar taxpayer bailouts.

Late in the month, New York’s iconic Plaza Hotel announced it had stopped taking guests and would lay off 251 of its staff.

“The malls are closed, people aren’t shopping the way they were, and obviously big business, Las Vegas, convention centers, business travel stopped,” said Haendel St. Juste, a real estate investment trust analyst at Mizuho Securities USA. “Who’s got the most risk? Retail, gaming, lodging.”

Real estate investment trusts exposed to these sectors tanked as the crisis escalated. The FTSE Nareit All REITs index, which includes all listed U.S. REITs, lost more than 12 percent of its value in the second week of March and nearly 22 percent the week after that with hotel and retail trusts taking the biggest hits.

Pebblebrook Hotel Trust saw more than 56 percent of its value wiped out between March 2 and the hotel industry’s March 17 plea for federal aid. Mall owners Macerich and Simon Property Group fared little better with drops of nearly 56 percent and 54 percent, respectively. Starwood Property Trust, one of the nation’s largest mortgage REITs, saw its shares plummet by more than 40 percent, and even a stalwart such as Boston Property Group took more than a 21 percent hit.

With escalating lockdowns keeping customers at home, hotel occupancy rates in some markets plunging into the teens and no clear picture of how long the crisis will last, firms are responding with mass layoffs and appeals for government support. Policymakers are imposing rent and eviction moratoriums, and analysts are warning of permanent changes in shopping and travel habits and supply-chain disruption that could even run into the holiday shopping season.

Over just a few days, New Yorkers went from avoiding handshakes and shunning the water cooler at work to holing up in their homes under a state-mandated lockdown with schools, offices and “nonessential” businesses closed indefinitely.

Barry Sternlicht, chairman and CEO of Starwood, offered what he characterized as an optimistic take on the impact of the coronavirus in a mid-March interview with Bloomberg.

“We’re facing World War III for 90 days,” he said.

Hotel heartbreak

Granted, Sternlicht did go on to add a reassuring caveat: “It’s not World War III for five years.”

For many in the hotel industry, even 90 days may be too long to keep up the fight.

Across the country, occupancy fell to an average of roughly 30 percent in late March, according to hotel research firm STR, while in New York City — now the epicenter of the U.S. outbreak — the rate dropped to 17 percent. And the worst is likely yet to come.

“That average is staggering on its own, but it’s tougher to process when you consider that occupancy will likely fall further,” STR senior vice president Jan Freitag said.

On March 17, hotel industry representatives went to the White House to plead for a $150 billion bailout package with the American Hotel and Lodging Association telling the Wall Street Journal that half of all U.S. hotels — many weighed down by excess inventory and debt — could close without support from Washington.

But the massive corporate bond-buying program announced by the Federal Reserve on March 23 will purchase only investment-grade paper. That shuts out hotel and retail firms with their lower-rated bonds.

“The coronavirus has already had a more severe economic impact on the hotel industry than Sept. 11 and the 2008 recession combined,” Chip Rogers, CEO of the American Hotel and Lodging Association, told the Journal.

Between March 2 and the day of the bailout plea, industry titans Wyndham Hotels & Resorts, Hyatt Hotels Corp. and Marriott International saw their stocks dive by 49 percent, 41 percent and nearly 39 percent, respectively.

About $100 billion of the proposed bailout would go toward retaining workers, and the remaining $50 billion is earmarked for debt service. The sector was already highly leveraged, and several high-profile hotel loans in New York had gone into default even before the coronavirus outbreak started to bite.

In the meantime, hotel firms are desperately slashing payroll. On the same day he begged President Donald Trump for a bailout, Pebblebrook Hotel Trust CEO Jon Bortz announced plans to lay off 6,000 workers.

Pebblebrook owns 54 hotels across the country with more than 13,000 rooms and is one of the nation’s largest hotel owners.

“We are looking at closing the doors at more than half of our properties,” said Bortz, whose total compensation in the most recent fiscal year was $5.65 million.

Marriott, the world’s largest hotel company, also announced sweeping layoffs as it closes hotels around the world, the Journal reported, putting tens of thousands out of work. The company even plans to furlough most of its corporate staff and  dish out pay cuts to remaining staff.

Hotels are adapting in other ways as well. Some are filling rooms by providing the city with space for mandatory quarantines or talking with the city’s Emergency Management agency to book rooms for non-coronavirus patients. There are similar discussions with the state.

Meanwhile, hotels like  the Four Seasons on East 57th Street, the Room Mate Grace Hotel and the Wythe Hotel have offered free housing for doctors, nurses and other medical staff coming in to backstop the overtaxed staff at the city’s hospitals.

Developer Michael Shvo — who had to shut down his three Miami hotels, the Raleigh, Richmond and South Seas — said the coronavirus outbreak has been a reality check for everybody.

“Until two weeks ago, you woke up, ran to make more money, ran to buy buildings,” he said. “Now, you want to make sure you have food, toilet paper and a job.”

The streets of the city are eerily abandoned after Gov. Andrew Cuomo ordered all nonessential workers to stay home starting March 23.

The pandemic hit the city’s hotels at a particularly vulnerable time. Profit margins have been shrinking for years because of rising taxes as well as increased competition from a flood of new hotel rooms and Airbnb listings.

Some hotels were struggling to make their debt payments even before tourism ground to a halt.

The 476-key Hilton Hotel in Times Square, for example, had been put on watch because of a dangerously low debt-service coverage ratio — a metric used to gauge a property’s ability to cover its mortgage payments.

“Hotels that have low debt-service ratios were already vulnerable,” said Anne Lloyd-Jones, a senior managing director at hospitality consulting firm HVS. “They have a very thin layer of protection.”

According to CMBS data firm Trepp, more than half a dozen hotels in the city were not generating enough cash flow before the pandemic to cover their debt payments, meaning owners had to reach into their pockets. And there were still more treading dangerously close to that point.

The U.S. hospitality industry is being swamped by a wave that previously crashed over markets where the outbreak hit first;  the industry’s experience holds clues on what to expect. And for all the uncertainty hotels are facing, one thing is clear: It’s going to get worse.

“Through comparative analysis of the occupancy trends in China and Italy over the past weeks, we can with certainty say that we are not yet close to the bottom in the U.S.,”  Freitag said.

American nightmare

The $5 billion dollar American Dream Mall in New Jersey was poised to celebrate the opening of several high-profile stores and attractions, including its indoor DreamWorks Water Park, on March 19.

But a few days before, the most expensive mall ever built in America announced it had canceled the events and would remain shuttered through at least the end of March.

Other major mall landlords followed suit. Simon Property Group, which is in the middle of closing on the acquisition of Taubman Centers, also said it was shuttering its properties.

Many major retailers were already closing their doors or reducing hours well before city and state governments began mandating closures. By mid-March, Macy’s, Apple, Nike, Nordstrom, Urban Outfitters, Peloton, Lululemon and many other brands announced plans to shut all their North American locations for about two weeks. Most of the mall at Hudson Yards closed indefinitely. Others retailers, including Starbucks, Sephora, Walmart and the Gap, closed some locations or reduced hours of operation.

The closures could have a big impact: There are already projections that retailers’ sales may be down 50 percent to 70 percent in the second and third quarters, depending on how much business they have online, said Deborah Weinswig of Coresight Research, which provides research on the retail industry.

Right after Gov. Andrew Cuomo banned gatherings of more than 500 people on March 12, Jing Fong, the city’s largest Chinese restaurant, announced the closure of its Chinatown location, which seated 800 guests.

The closures could disproportionately hit small businesses, who will be very challenged without significant federal and local support, Weinswig said. Coresight has upped its projection for store closures this year to 15,000 from 8,000, expecting smaller retailers to make up much of the anticipated increase.

“It’s just going to weigh on the smaller, weaker companies a bit more,” Mizuho Securities’ St. Juste said.

Ironically, the retail industry was in the middle of a transformation before the coronavirus hit, said Chris Wimmer, vice president at credit rating agency DBRS Morningstar, with many landlords swapping product-oriented tenants with experiential and dining-based concepts.

“Now that you have this coronavirus, it’s really tying their hands because people can’t even go to the malls for those experiential concepts that [landlords] brought in,” Wimmer said.

Still, the pandemic is leading to some success stories — namely, retailers who supply essential goods. Pharmacies and grocery stores have been allowed to remain open even in cities under otherwise complete lockdown and are seeing a surge in business. Drugstore chain CVS said it plans to hire 50,000 additional employees.

Also, as the homebound turn to e-commerce, firms that provide the likes of Amazon with last-mile warehouse space — such as Prologis and Blackstone — could see a windfall. Prologis’ stock has already started to recover its losses from the market tumble.

And even if some stores do default on their rent, Alexander Goldfarb, a REIT analyst at Piper Sandler, said large mall owners like Simon and Taubman should be able to weather the storm — at least for a while.

“If this lasts long enough to really impact mall landlords,” he said, “the country has much bigger issues.”

Holding the bag

Even with cities in many major markets under lockdown, Goldfarb said, big commercial landlords shouldn’t panic yet.

Many of the retailers forced to turn out the lights may be able to tap business-interruption insurance to cover expenses such as rent. Pandemics are generally not covered by such insurance, but it may kick in if stores are required to close by civil authorities, Goldfarb noted. And besides, he said, a lease is a binding contract.

“Tenants have to pay rents,” he said. “Rents are not voluntary.”

But some landlords were already being put on notice that the rent check might not come on April 1.

Sandwich chain Subway sent a letter to landlords in late March saying it may cut off rent payments if franchisees have to stay closed on government orders. Several landlords told The Real Deal they’ve received similar letters from tenants.

Restaurants and retailers facing the same problem are considering invoking contract clauses for “force majeure” events or “acts of god” to put off payments.

Rent payment may be moot for the time being anyway, as the state’s Chief Administrative Judge Lawrence Malks has ordered an indefinite suspension of evictions, including of commercial tenants. Commercial landlords, however, haven’t been granted any similar protection from foreclosure.

“Landlords are sort of in the middle,” said Rosenberg & Estis attorney Eric Orenstein. “They want to help their tenants who want to pay the rent, but they also have an obligation to pay their lenders.”

However, developer Steven Witkoff told TRD that he couldn’t imagine a “credible” U.S. bank calling a default on a loan at this time.

“It would be unpatriotic and un-American,” he said.

After the fever breaks

The pain for the retail and hospitality sectors will probably last longer than the pandemic that caused it.

Beyond the hit from loss of sales during store closures, analysts predict that retailers will suffer lingering effects even after customers return, as the virus will have a lasting impact on global supply chains. The National Retail Federation is warning that mounting disruptions in production, transportation and port facilities could throttle retailers’ ability to stock shelves for the vital back-to-school shopping season and maybe even into the holidays.

The prolonged lockdowns may also have a long-term impact on consumer behavior as they get used to buying more online, said Kevin Brown, an equity analyst at DBRS Morningstar. And an accelerated shift toward e-commerce could be a lasting threat to retail stores — and their landlords.

“Taking that slice of sales away from brick and mortar really will negatively impact what goes around to all the different tenants for the retail REITs,” Brown said.

Some in the hospitality and event industry also worry that the longer companies have to do business via video conference and find customers and vendors without rubbing elbows at trade shows, the less willing they will be after the crisis to board a plane or stand in line for a lanyard.

Much will depend on how long the shelter-in-place lockdowns last and how eager customers are to reclaim a sense of normalcy. Damage to the retail and hospitality sectors has already been severe, and with so much uncertainty, it’s unclear how well many of those firms will survive the outbreak.

“I don’t want to sound glib,” Wimmer said, “but it’s a category killer.”

― Additional reporting by Sylvia Varnham O’Regan, Erin Hudson, Kathryn Brenzel and David Jeans