Lodging Exposure to Coronavirus in Commercial Real Estate Collateralized Loan Obligations

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NEW YORK–Kroll Bond Rating Agency (KBRA) released a report on lodging exposure in commercial real estate (CRE) collateralized loan obligations (CLOs), due to the quickly evolving events related to the coronavirus (COVID-19).

KBRA expects CRE to be widely impacted by the economic downturn caused by restricted population movement and interaction measures to limit the spread of COVID-19. Lodging is considered to be the most vulnerable CRE property type owing to its dependence on nightly room rates, compared to CRE with longer-term leases. Further, the lodging property type has already been meaningfully affected by the curtailment of business travel, events, and tourism resulting from containment efforts.

The virus’ negative ramifications on the lodging sector has been quick and dramatic as U.S. revenue per available room (RevPAR) rates fell 32.5% year-over-year (YoY) during the week of March 8, with the New York, San Francisco, and Seattle markets down over 50% YoY as reported by STR. In addition, RevPAR data is expected to show further degradation as containment efforts continue to become more stringent.

KBRA is actively monitoring the asset class across our rated CRE securitization universe and particularly lodging properties in CRE. Given the transitional nature of the assets underlying CRE CLOs, we believe that these properties may be more exposed to dislocation relative to stabilized assets.