Real estate analysts say they expect to see the number of defaulted loans increase throughout 2023, especially since Federal Reserve Chairman Jerome Powell committed this week to continuing to raise interest rates in an attempt to stifle inflation.
The downtown Sheraton is among a number of older Atlanta buildings struggling to find their places in the post-pandemic economy. Though travel demand has surged since the pandemic, business travel that convention hotels like the Sheraton rely upon hasn’t fully rebounded. Owners of some office buildings, meanwhile, are struggling to pay their loans as tenants shrink the sizes of their offices amid the sustained popularity of hybrid work schedules.
And for those owners with loans coming due, higher interest rates and tighter lending practices mean some borrowers are in trouble.
In recent months, the 10-acre site slated for the Forge Atlanta mixed-use development and several buildings within the Peachtree Center office complex underwent recent foreclosure sales.
Chris Tierney, a partner and consulting practice leader for Atlanta-based Moore Colson CPAs and Advisors, said older hotels like Sheraton are among the most vulnerable to hard economic times, especially after the pandemic upended business travel.
“Most borrowers right now are probably paying three to four times the interest rates they were paying three or four years ago,” he told The Atlanta Journal-Constitution. “And how are going to cover that if you’re a hotel that thrives on business and convention traffic, and both of those are down?”
It is possible Apollo and Arden could come to an agreement that would forestall foreclosure. Arden declined to comment, and Apollo did not respond to requests for comment.
Guests at the Sheraton are unlikely to see any changes to operations as it’s in the interests of Arden and Apollo to keep things running smoothly and maximize the hotel’s value.
Kevin Davis, CEO of Jones Lang LaSalle Hotels & Hospitality for the Americas, said Sheraton’s fate could signal hard times for similar hotels in major cities. He called the Sheraton’s loan troubles “a bit of a sideshow — not the main event.”
“The Fed is dead set on continuing to raise rates, and that’s going to create particular pressure on assets that have not yet fully recovered, even for assets that have recovered,” Davis said.
Business travel vs. vacations
As the metro area’s sixth largest hotel, Sheraton Atlanta has been a fixture of the city center’s convention and business travel ecosystem.
The hotel, which was built in 1965 and originally branded as Marriott Motor Hotel, was acquired by Arden in 2017. The Philadelphia-based commercial real estate management company paid $64.2 million and took out a $77 million senior mortgage with Apollo. Another $28 million in debt was secured in 2019, with Arden also investing an additional $7 million in renovations.
The same year, Sheraton was hit by a Legionnaires’ disease outbreak, which derailed operations for weeks.
That paled in comparison to the effects COVID-19 would have on Sheraton and hotels across the country. The U.S. Bureau of Labor Statistics reported that hotel occupancy rates fell to 25% in April 2020, a 64% decline from a year prior.
Davis said some hotel segments, such as leisure and resorts, recovered last year and surpassed pre-pandemic levels, while business travel remains down 10% nationwide from 2019. Older hotels in urban centers, such as Atlanta, have lagged behind smaller markets, he said.
“I don’t think (Sheraton) is a comment on the Atlanta hospitality market,” Davis said. “I think it’s a comment on the slower recovery of urban and suburban big box hotels.”
Arden placed Sheraton Atlanta up for sale in 2021 amid the hospitality industry’s recovery, the Atlanta Business Chronicle reported at the time. But Tierney said most downtown Atlanta hotels were still struggling despite the uptick in vacation travel.
“Atlanta is not a holiday destination for most people,” he said. “When you read about where people were going, they were going to the mountains or the beach… so Atlanta hotels, the Sheraton being one of them, didn’t really feel that boom.”
Real estate publication Bisnow first reported Apollo’s designation of the Sheraton loan as being at risk of foreclosure.
Downtown properties have been the first to feel the weight of rising interest rates and changing workplace trends, but real estate analysts predict the effects will continue. Tierney expects more building owners, especially those with older assets, may decide that foreclosure is the best option.
“They’re looking two-to-five years out and they don’t see a rebound,” he said. “So why try to catch a falling knife when you can just drop it right now, walk away and let the commercial bank deal with it.”
3 things to know
1. Sheraton Atlanta Hotel history:
- Opened in 1965 as a Marriott hotel, the Sheraton is metro Atlanta’s sixth-largest hotel with 763 rooms.
2. Turbulent times
- The Sheraton suffered a Legionnaire’s disease outbreak in 2019 and like other hotels was walloped by the COVID-19 pandemic.
3. Downtown defaults
- A number of Atlanta area commercial properties could suffer financial distress in the coming months. Two high-profile projects, the Forge Atlanta and several buildings at Peachtree Center, were recently taken back by their lenders through foreclosure.