A recently released report identified Houston, Texas as one of the most troubled markets within the Kroll Bond Rating Agency (KBRA) ratings universe, which covers most major U.S. metropolitan areas. KBRA’s observations of the top 25 lodging markets revealed that loans within the Houston MSA were more frequently identified as loans of concern, meaning the loans had an elevated probability of default than those in any other market. Loans of concern primarily exhibit substantial declines in cash flow relative to levels underwritten when the loan were closed.
Of the 80 CMBS hotels secured by CMBS conduit loans located within the Houston MSA, 27 (33.8%) serve as collateral for loans that have been identified as loans of concern, of which 24 are loans that were securitized after 2010. The next-highest concentration was represented by the Washington, D.C. MSA (21.7%), where 13 of 60 lodging loans were designated as loans of concern. Philadelphia rounded out the top three MSA exposures with 8 (17.8%) of its 45 lodging loans identified as loans of concern.
Among the factors behind performance declines for the Houston MSA are exposure to the energy sector and oversupply, both of which have led to declines in average occupancy. According to a May 2017 STR report, average occupancy declined 3.6% year to date from May 2016, which was the worst among the Top 25 markets despite slight bumps in ADR during February 2017 from Super Bowl LI. Average occupancy within the Houston market for year-to-date May 2017 was 63.7%.
As the price of oil stabilizes and the realization that domestic oil and gas production in Texas, particularly in the Permian Basin, is cost effective even at $40, the Houston market should begin to recover as new supply is absorbed over the next 18-36 months.