As the COVID-19 economic crisis continues to worsen, current and recently laid-off employees in the hotel sector globally will continue to struggle, and in many cases, suffer severely. According to Martin Leary, Director of Research at labor union, UNITE HERE, “Hotels were one of the first businesses to lay off people in the U.S. in mid-March. Big hotel chains had an understanding of what was going on with COVID-19, because they have a presence in China. They quickly drew down lines of credit and started laying off people.” Most of the large hotel brand companies have as much as “two-years’ worth of cash,’ explained Leary. While large hotel corporations may be able to withstand a long-lasting crisis, their laid-off workers, many who will soon run out of health insurance as well, cannot.
The hotel industry has been decimated as lockdown and shelter-in-places measures continue in most of the world, and unfortunately, there is very little respite in sight. Trepp Bank Research conducted an analysis using the Federal Reserve’s extremely adverse economic scenario of 10% unemployment for banks’ annual stress tests. Under this scenario, lodging would have an almost 35% default rate. Given that over 20% of the American workforce is now unemployed, I think that the default rates will unfortunately end up much higher than 35%, which in turn, will lead to even more workers being laid-off.
In the hopes of providing economic relief for Americans, United States, legislators passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act on March 27. The CARES Act includes a $454 billion for an economic stabilization fund to support severely distressed U.S. businesses. Within four days of the CARES Act being signed, several hotel industry bodies sent a letter to Federal Reserve Chairman Jerome Powell and U.S. Secretary of Treasury Steve Mnuchin requesting additional relief for eligible travel-dependent businesses and also for organizations that are not eligible to receive other assistance under the CARES Act. Their requests, mostly directed at the Federal Reserve, go significantly beyond what is already in the CARES Act, and their Christmas wish list does not include protecting or bringing back hotel workers. Instead, many of their requests are about receiving more taxpayers’ funds to pay back existing lenders.
As I wrote in mid-March, people should be bailed out before corporations are. If big hotel owners and operators are struggling, they should freeze and even reduce executives’ bonuses, and stop all share buybacks and dividend payouts for the sake of protecting their workers’ pay and healthcare.
Leary explained to me that, “Hotel owners are often real estate investors who generally buy and sell hotels and take out loans of various kinds to increase the returns on hotel investments. Hotel owners are predominantly composed of private equity companies, real estate investment trusts, high net worth individuals and sovereign wealth funds.”
Essentially, hotel owners want the CARES ACT to pay for loans that they took out way before COVID-19, often to pay executives big bonuses, to buy back shares and to pay shareholders dividends. There needs to be strong supervision of any loan or bail out requested now to make that loans are really being used to protect existing employees’ paychecks or to bring back laid-off workers. The problem is that any hospitality company that has a Standard Industrial Classification (SIC) code #70 can be eligible for Small Business Association loan, as long as each property has less than 500 employees. As Leary explained to me “Most hotels have less than 500 employees. About two-thirds of hotels qualify for loans. Unfortunately, since there is no transparency, we do not know who exactly is applying.” What this means is that even private equity firms such as Colony Capital and Clarion, which have a hotel portfolio and have less than 500 employees here in the U.S., would qualify to take out an SBA loan through the Paycheck Protection Program.
Another hotel lobbyists’ request, with which I do not agree is, calling for a backstop for Commercial Mortgage Backed Securities (CMBSs) by the Federal Reserve. CMBSs are bonds backed by pools of commercial mortgage loans, including risky ones taken out by non-residential borrowers, such as hotel owners and developers. When commercial mortgage borrowers are fulfilling their loan contract obligations, CMBSs are profitable investments for investors such as banks, asset managers, REITs, pension funds, insurance companies, and sovereign wealth funds. When borrowers start to pay late and especially if they default, CMBS investors stand to lose a lot of money. Why should American taxpayers, the vast majority who are not invested in CMBSs come to the rescue of allegedly sophisticated investors?
In a letter to Federal Reserve Chair Jerome Powell, D. Taylor, International President of UNITE HERE, wrote “the AHLA asked for debt relief and credit market support for $300 billion in hotel loans, including $86 billion of commercial mortgage backed securities (CMBS). While they make their plea in the name of hotel employees, it has become clear to us that major hotel owners and operators have divorced themselves from their workers.”
Making matters worse is that unemployed hotel workers, like the over 30 million newly unemployed have been struggling to obtain Unemployment Insurance (UI) due to overwhelmed state departments of labor.
Yesterday, I interviewed a woman who had worked at the Fontainebleau Hotel in Miami for a decade. “In early March, I was laid-off; I received my wages and my vacation was paid,” she told me in Spanish. “But I now have no medical insurance. I went to interview at a Walmart, but I have not heard anything back.” And her problems are not just her. She has dependents. “I have two teenage grandkids I have to take care of.” She would not go on the record for fear of “not being able to go back to Fontainebleau someday soon or to find work elsewhere.”
Unfortunately, the next disaster will be when the unemployed have apply en masse for Medicaid. Not all states will have the funding. In some cases, hotel companies can keep workers on their insurance plans, especially if they get a bailout. Yet, if hotel operators and the big chains get more emergency funds, there is no requirement to keep workers on company insurance. When the unemployed cannot get insurance from their employers, this means that hotel executives and operators are dumping these workers on to all taxpayers. As challenging as it has been to set up U.S. Treasury and Federal Reserve programs to try to rescue the economy, it is imperative to remember that these programs need serious oversight. Rescuing the economy should mean rescuing American workers ahead of executives.