Commercial Magazine

Despite a travel resurgence, hotels face a multiyear recovery

By Victor Whitman

With the COVID-19 pandemic fading, it’s tempting to assume that the hard-hit hotel industry will immediately recover due to a surge in vacation travel. The truth, according to analysts, is more complicated than that. Hotel forecasts suggest that the industry will recover slowly, which will affect financing decisions — as well as the values and sales of properties — as far out as 2024. The fallout from the health crisis also could permanently change how hotels are operated.

“There are still a lot of owners who are struggling right now,” says Alison Hoyt, STR’s senior director of consulting and analytics. “Things are not going to turn around immediately.”

This past spring, hotels were doing much better following the rollout of vaccines. In early June, the national occupancy rate reached 66%, up from a nadir of less than 25% near the start of the pandemic in 2020, STR reported. Industry watchdogs, however, don’t expect hospitality as a whole to recover to its pre-pandemic levels of revenues and profitability for at least three more years.

“April’s gross operating profit was about 60% of 2019 levels when we look at the same month in 2019,” Hoyt says. “So, certainly, we’re seeing demand and occupancy increase, and we’re encouraged to see that, but there’s still a long road to recovery. When we look at RevPAR (revenue per available room) and profits, we’re still talking about a multiyear recovery for the hotel industry.”

CBRE projects a similar long-term recovery, reporting that average occupancy rates across all types of hospitality properties will barely eclipse 50% this year. Occupancy rates will not reach their 20-year average (2000 to 2020) of 61% until 2023. CBRE expects occupancy to grow to 66% in 2025, which is still about one percentage point lower compared to 2019.

Certain hotel types have fared better than others during the pandemic. Even during the depths of the crisis, Hoyt says, the typical limited-service hotel was able to maintain a steady stream of bookings from people who had no choice but to stay in a hotel or motel room. These guests include construction workers temporarily working in an area, long-haul truckers, vacationers on road trips and families relocating to new communities.

Luxury properties with restaurants, convention space and other amenities, however, were crushed by the pandemic. The full-service hotel depends on big crowds and group events to stay busy and remain profitable.

“Taking away group business was a significant loss to those hotels,” Hoyt says. “They have 100,000 square feet of meeting space that’s just sitting empty for the past year and a half, and there’s been no groups that have needed to rent that space. That hurts banquets, and a lot of food and beverage outlets have been closed, so it’s just been a harder road for these hotels to adapt their operations in this environment.”

Hoyt says that group travel to conventions and other events will be the last to recover. By this summer, however, domestic vacation travel is likely be close to normal, STR projects. Business travel will likely pick up steam in the latter part of this year, but group travel won’t recover until first-quarter 2022. For this reason, it will take longer for full-service hotels that depend on conventions and large events to get back to the performance levels of 2019.

In the meantime, it is a good time to buy hotels, according Jay Litt, principal of the LittKM Group. “This is the very inception of a new cycle,” Litt says. “So, the guys with the big bucks are out there trying to buy as much as they can. There’s a lot of quiet transactions going on.”

A lot of guys that would traditionally be buying hotels are going to wait, sniffing the air for the forest fire that’s coming.

Jay Litt, Principal, LittKM Group

Litt says that many small operators have stayed afloat via federal loan programs that have allowed them to meet payroll expenses. Once this federal assistance ends, he notes, some of these owners will likely need to find equity partners, or they’ll be forced to sell or go into foreclosure. Investors are likely to pick off the best of these properties over the next several months, he adds.

“It is a good time to buy a hotel if you can, but the hotel pricing has not come down as much as everyone thought,” Litt says. “The pricing of hotels is still not what you would call traditionally distressed. They haven’t gone into distress yet, but they will probably be in the fourth quarter (of this year) or the first quarter of 2022. So, a lot of guys that would traditionally be buying hotels are going to wait, sniffing the air for the forest fire that’s coming.”

Litt isn’t concerned about long-term demand for hotels, however. He believes that conventions and business travel will bounce back fairly quickly despite the growing popularity of remote meetings. But it is likely that many hotels will cut housekeeping and other services to bolster profitability, he says.

“I think you’ll see hotels going more toward the Airbnb model, where guests check in and then they get their towels,” Litt says. “You tell guests, ‘We’re not going to deep clean your rooms. We’re just going to change your linens and your towels,’ and get out.” ●


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