Introduction to Hotel Industry Troubles
The coronavirus pandemic has impacted all industries, but perhaps the most significantly impacted has been the hospitality industry. As early as February, international travel from certain countries was banned. A COVID-19 outbreak caused by an international convening of biotech executives in Boston sparked the cancellation of corporate conferences from coast to coast. Shortly thereafter, states implemented “stay at home” orders which effectively halted all leisure travel. Many hotels had no choice but to shut down entirely.
The tide is beginning to turn, a bit. States have begun to reopen, though restrictions on hotels remain widespread in many locations.
In this article, we look at how COVID-19 has impacted the hospitality industry, including how hoteliers have pivoted in an effort to simply survive. We look at when the hotel industry might realistically recover, and what opportunities might emerge for those looking to purchase hotel properties in the months and years to come.
What impact has COVID had on the hotel industry?
As noted above, coronavirus sparked expansive travel restrictions including a ban on almost all international travel for some time. Americans were urged to stay home, forcing many people to cancel their vacations and other plans that would have required hotel stays. Absent demand, many hotels have shut down entirely. Those that have remained open often did so only in a limited capacity, usually to serve essential workers who had nowhere else to go.
As a result, hotel revenues have plummeted. According to STR, one of the nation’s leading hotel research firms, April 2020 was the single worst month on record for hotels. Here’s a snapshot of a few key metrics:
- Occupancy: 24.5% in April (- 63.9%)
- Room Demand: -68.3%
- Average Daily Rate: $73/night (-44.4%)
- RevPAR*: $18 (-79.9%)
- Room Revenue: -82.4%
*RevPAR is a key hotel industry metric that refers to revenue per available room.
These metrics are unlike any experienced by the hotel industry before.
They are worse than the declines experienced after 9/11 and during the 2008-10 Great Recession. By way of example, RevPAR declines during other recessions has been closer to 20-25%. This time around, the RevPAR year-to-date through May is closer to 80% nationally, with numbers not yet looking up.
Another way to put this in perspective is to look at the break-even point needed for hotels to remain viable: nationally, hotels must remain 55% occupied in order to remain financially solvent. In some markets, the occupancy levels must be closer to 60-65%. From January through April, the national occupancy rate was just above 45%, meaning it will be difficult for some hoteliers to survive.
How has hotel construction been impacted by coronavirus?
Surprisingly, hotel construction has not taken the hit we would have expected it to. Construction activity is currently exceeding the prior peak. In 2007, there were approximately 211,000 hotel rooms in the pipeline. Today, there are 220,000+ hotel rooms under construction. This represents roughly 2% of total supply, some of which will be absorbed this year and some of which will take longer to come online. This growth rate is considered healthy and is indicative of the long-term outlook for the industry.
One of the reasons the construction pipeline has not slowed is because financing for these projects was already secured and in place. Lenders have not shown a willingness to pull back—yet. Moreover, the labor market is more favorable today than it was in recent years. There had been a shortage of construction workers, which tempered hotel construction to some degree. There are more available workers today, which should serve to boost construction activity.
What types of hotels are in greatest demand today?
We are seeing a distinct segmentation in hotel demand: select-service and extended-stay are outperforming full-service, corporate and leisure properties.
Select-Service / Extended-Stay:
As it turns out, these properties are well positioned to perform well during a global pandemic. They are designed to attract transient people, including workers who are traveling on a short-term basis for job opportunities. During an economic downturn, people will flock to where the jobs are, and for various reasons, signing an apartment lease might not be practical. Select-service and extended-stay hotels are a good fit for these workers. Most rooms have kitchens, which is an added benefit now that restaurants have been closed and takeout options remain limited in many areas. Roughly 71% of current hotel construction is in the select-service category.
Corporate / Full-Service:
Demand has plummeted for corporate and full-service hotels. Companies aren’t hosting corporate gatherings, trade shows and other big events – now or for the foreseeable future. Full-service hotels, particularly those that cater to leisure travelers, are also suffering now that so many Americans have put their vacation plans on hold.
Where are there opportunities to invest in hotels today?
We aren’t seeing extreme distress situations just yet, but that doesn’t mean there won’t be opportunities like these on the horizon in the months and years to come. Many hotels have moved to operating on skeleton crews, utilizing PPP loans when possible to get through the interim. How long they can survive using PPP funds remains a big question and depends largely on when states allow hotels to reopen and under what conditions.
That said, there are some opportunities for hotel investors to keep an eye out for:
Smaller, boutique hotels:
These properties may be the most likely to go under. Independently run hotels usually have fewer resources and less muscle strength than their corporate, flagged competitors. As such, they’re typically the lease likely to ensure a downturn.
Hotels in destination locations:
These properties are also likely to suffer as leisure travel continues to be weak. It may be that some boutique hotels never survive and, instead, become second (or third) residences for the ultra-wealthy.
Struggling but otherwise well-located hotels might be prime candidates for adaptive reuse into alternative product types such as multifamily, student housing, or even office buildings. This happened during the 2008-2010 downturn, as well as after Hurricane Katrina. Several hotels closed in the aftermath of Hurricane Katrina and later reopened as properties that had been converted to condos and office space.
What marketing techniques are hotels using in response to COVID?
Hoteliers have had to adapt, and quickly, in response to coronavirus. Here are a few of the strategies we’ve seen hoteliers employ during this crisis:
- Opening for Essential Workers: Some hotels have kept their lights on by shifting their focus to serving essential workers, such as first responders. In some cases, these rooms were offered for free or at an extremely reduced cost. In other cases, hotels (particularly motels and extended-stay facilities) have been rented out by hospitals to provide a respite for first responders who cannot safely return home without putting their families at risk. We saw this most frequently in NYC as the city was ravaged by the pandemic. Some cities have rented out hotels, or blocks of rooms at hotels, for the same reasons. This marketing technique has allowed hoteliers to earn just enough to survive—to keep the operation going and their staff on payroll.
- Emphasizing Safety in all Messaging: Nearly all major hotel brands have adopted marketing language that reminds people “we’re here for you, you’re safe in our hotel rooms for when you’re ready to travel again.” Marriott, Hilton and IHG all have campaigns that use some form of this language. The American Hotel and Lodging Association has emphasized the importance of safety as well, creating “safe stay” guidelines that many major hotels, management companies, and ownership companies have all signed on to in recent weeks.
“The brands have done a phenomenal job in coming up with these campaigns and really humanizing ads,” explains Vail Ross, SVP of Global Development & Marketing for STR, in my podcast conversation with her. “They’re reminding people, ‘We’re going to be a cleaner, safer place for you to come. This is going to be an extension of our home, and here’s what we’re doing to make you feel that way.’ This is a shift from the past, where safety was more about being a physically secure place.”
- Engaging Customer Base in Creative Ways: We’re seeing hoteliers get creative with how they utilize their facilities amid otherwise widespread shutdowns. For example, a hotel in Nashville once hosted a singer/songwriter night at their hotel bar that has since been cancelled because of limitations on gatherings. Instead, the hotel has staged a drive-in where people can pull up to an outdoor stage in the parking lot to listen to music. The hotel has combined this with curbside delivery of food and drinks, which makes for a fun night out for people looking for a safe form of entertainment. A portion of the admissions proceeds goes to the songwriter, another portion is donated to first responders. This is a great way for the hotel to build goodwill and engage their customer base in a new way.
- Utilizing Social Media: Hoteliers are placing a greater emphasis on social media in the wake of the COVID-19 crisis. They are utilizing both paid and organic media to engage their audiences. Social media has been at the forefront because everyone is now in front of their computer, on Instagram, LinkedIn and Twitter now that they’re working from home and limiting in-person gatherings.
When will hotel demand recover?
During recessions, the hotel industry typically goes down hard and fast – but it also generally recovers quickly. There’s precedent for this “v-shaped” recovery, both after 9/11 and in 2009-10. It took the hotel industry about 12 months to recover after 9/11 and about 19 months to bounce back from the 2009 trough. Unfortunately, hotel experts are less optimistic about a quick recovery this time around. STR speculates that this recover could take significantly longer – closer to 37 months – for the hotel industry to return to pre-COVID levels.
There are two primary things that will influence how the hotel industry recovers:
- Physical security. Guests will need to feel physically safe before they start traveling again at widespread levels. This may not happen until there’s sufficient vaccine development or even a cure for COVID.
- Financial security. This recession may have been caused by a global health crisis, but it has had widespread economic impacts to people at every socioeconomic level. Right now, unemployment is at record highs. People need to feel comfortable opening their wallets for leisure travel before the hotel industry will fully bounce back.
Both physical and financial security will impact a third factor: corporate travel. Companies must feel that it’s both safe and economically prudent to send people on business trips in order for the hotel industry to fully recover. So many hotels are reliant on corporate travel, which may be slow to return in the months and years to come.
How can hotels best prepare themselves to survive this downturn?
While each hotelier will likely adapt its own policies in the post-COVID era, there are two strategies in particular that can help hoteliers prepare to survive this economic downturn.
- Get your finances in order. Hoteliers should stress test their hotel’s financial performance. Model the best case, likely case, and worst-case scenarios. Experience hoteliers are already doing this—utilizing data to stress test al scenarios and see what’s needed to adapt in each case.
This same advice applies to those who are looking to invest in hotels. Go through the P&L with a fine-toothed comb. Be extra conservative; a look back at recent data will not be indicative of how the hotel will perform in the future. Most hotels will look much different on the back end of this crisis, as restrictions begin to be lifted and hotels open up. It will take some time to get back to “normal,” and it remains to be seen what that new normal is.
- Be strategic with marketing efforts. It’s important for hoteliers to be communicating with their stakeholders- investors and guests alike. But there’s a fine line between communicating and over- Those who over-communicate risk that people will stop listening. Hoteliers must strike a balance: educate people, share knowledge, highlight your property amenities, etc. – but don’t overload people with information.
Related, hoteliers should begin thinking about what their marketing efforts will look like post-COVID. Most people will not be marketing at big conventions or trade shows for some time. The traditional marketing pamphlets, handouts, etc. may not be as effective as they were just last year. Those looking to be successful in the hotel industry will want to start thinking now about how to shift marketing efforts in the future.
The coronavirus has wreaked havoc on the hotel industry. There will be a clear bifurcation between those who adapt quickly and effectively, and those who never make it to the other side. Some hotels will inevitably go under, but this will create opportunities for strategic investments in hotel properties among those looking to diversify their portfolios.