In this article, Bob Drury, Senior Managing Director at Crexi, explores how COVID-19 has impacted the hospitality sector, how the commercial real estate industry responded, and what the future holds for hotels in a post-coronavirus world.
This article is reprinted from the Hotel Business Review with permission from www.HotelExecutive.com
It’s no secret that the hospitality industry was among the hardest hit in the wake of the coronavirus. In the US, approximately 18% of hotels are closed, and these numbers nearly triple when you zoom in on the largest MSAs, where almost 64% of room inventory is closed. However, there are signs of life on the horizon as the country enters various stages of re-opening. As social distancing restrictions lift and people emerge from quarantine, the lodging industry will likely see a resurgence in room occupancy, but stays will look very different from years prior.
Here, we seek to explore how COVID-19 has impacted the hospitality sector, how the commercial real estate industry responded, and what the future holds for hotels in a post-coronavirus world.
How coronavirus has impacted the hospitality industry
Hotels, unique among other CRE sectors, were hit by two distinct elements of the spread of COVID-19: the freeze of overall economic movement and government-mandated social distancing practices. Starting in March, incremental restrictions on international travel drove down air traffic on both business and personal trips. Conferences and banquets, which make up a large portion of hotels’ revenue, were canceled nationwide to comply with CDC guidelines. And as the fear of infection gripped the nation, people were quick to cancel travel plans and stay “safer at home.”
Of course, the sputtering of travel caused significant pain to the hospitality industry and the economy. Travel and tourism (hotels included) contributed $8.8 trillion and nearly 320 million jobs worldwide in 2018, per the World Travel & Tourism Council’s annual report. For scale, this amount is above the annual growth rate of the world GDP. In the face of COVID-19, California alone lost 500,000 travel sector jobs and will lose an estimated $54.5 billion in travel spending by the end of 2020.
CBRE’s most recent hotel report estimates a sharp reduction — from 66.2% to 42.6% — in occupied room nights in 2020 compared to last year. Per their projections, luxury hotels will experience the lowest occupancy at 33.4% annually, while economy hotels will achieve the highest occupancy rate at (a not much higher) 46.4% annually.
What’s left of the current hotel demand is from frontline workers — healthcare professionals and first responders — choosing to stay in rooms rather than risk their families’ health. Most hotels that are currently operating are doing so at a loss. And while they’re still helpful, there’s little relief to be found through PPP loans via the CARES Act, which covers approximately 47% of operating costs, according to the American Hotels and Lodging Association.
The domino effect of rent, landlords, and loans
As hotels struggle to stay financially afloat and — if they remain open — operate at a loss, many are unable to pay rent. Landlords, in response, have been scrambling for debt relief on lodging properties.
Moody’s Investor Services reports that as of May 2020, approximately $32 billion worth of commercial property loans has entered the “special servicing” phase. Special servicing is the first step for landlords seeking relief on commercial loans. A servicer sells the loans, packaged as commercial mortgage-backed securities (CMBS), to a secondary market to help keep the nonperforming loans afloat. The process is designed to help loans that may be in default or on the path to it. The entry of such a high amount into special servicing indicates that many landlords may have little faith in the short-term recuperation of losses.
According to Moody’s report, hotel properties are among the worst off, both in terms of loans entering special servicing and falling behind on rent payments. Late payments spiked to 20% on lodging properties in April, with the NYC and Houston MSAs among the most significant groups facing delinquencies.
However, despite some sources thinking we may see an impact on the hotel industry comparable to that of the Great Recession, the root of the issue differs from the last downturn. Hotels are suffering not due to underlying economic problems, but due to stay-at-home orders and minimized travel throughout the previous two months.
Hotels & COVID-19 through a commercial real estate lens
As travel restrictions hold staunch, hotel transactions have also frozen. April saw only eight lodging transactions valued greater than $2.5 million, the majority of which were small businesses. Per a report from Real Capital Analytics (RCA), transaction volume in April reached a shocking $42 million, compared to approximately $1 billion in March and $1.75 billion in February. Think of these numbers compared to the 10-year high in October 2017, which saw $29.5 billion in transactions.
Not all of this decline can be pinned on the coronavirus, however. According to RCA’s report, the hotel sector faced construction delays in major MSAs in Q1, as well as surging competition from lodging market startups and similar upstarts.
Buyers and sellers are frozen on both sides, as expectations of long-term market outlooks are still uncertain. It’s not a suitable environment for transactions to take place: there’s hardly any motivation for sellers to release properties at a discounted value unless they must.
However, despite the economic standstill, investors are bullish on the hospitality industry’s future. Many buyers and entities are assembling capital to take advantage of future opportunities that may appear. The US is slowly re-opening, with individual states currently in different phases of entering our new normal. While it will take time to soothe consumer and investor worries about coronavirus risk, the hospitality industry has nowhere to go but up.
Prospects & signs of life for hotels
At Crexi, we still see healthy activity across hospitality properties in our database. Monthly search activity for hotels increased by 10% in May from April and are yet ranked fourth for the highest number of search actions — behind only multifamily, retail and industrial. This indicates that opportunistic investors see the potential for growth amidst the hotel sector’s current turmoil.
History also points to the likelihood of a fast recovery. In 2009, the US faced both the Great Recession and the impact of the H1N1 pandemic. The death of approximately 12,000 US citizens correlated with a dip in international tourism from 950 million in 2008 to 911 million people in 2009. However, this number recovered in 2010 to 973 million people traveling, reaching a peak in 2018 of 1.44 billion annually.
Today, we’re already starting to see recovery signs.
There’s pent-up demand and desire for travel, as house-bound individuals long for an escape from the mundane repetition of quarantined life. Markets in South Carolina and Florida have already seen weekend upticks in occupancy rates, particularly following Memorial Day weekend. Nationwide occupancy at the beginning of May hit 28.6% up from a 24% average in April — a small, first sign of returning demand for leisure in states with eased restrictions.
It’s likely these guests are opting to drive to nearby hotels, rather than flying to far-off states or countries, in search of “staycations.” As demand crawls back, hotels will need to reassure guests they’ve updated operations to protect against COVID-19 transmission. Clients will care more about hygiene and safety and want to feel taken care of, as businesses strive to comply with the recently shared safety recommendations from the American Hotel and Lodging Association.
Hotel stays will likely be a much more stripped-down experience than those pre-coronavirus – which will affect luxury hotels more than economy lodgings. Until a vaccine or effective treatment is widely available, guests will want to drive in their cars and enter their room quickly, allowing them a sense of safety. Hotels will need to amp up their technology tools, to enable a seamless, no-contact experience for guests. How innovative businesses address these challenges will likely set the standard for hotel stays in the years to come.
CBRE forecasts that demand for the US hospitality sector will return to pre-pandemic levels towards the end of 2022. Hotels geared more towards events or banquets may lag behind their room-stay counterparts, as attendees will be slow to return to large group events. Conference hosts face a learning curve to mitigate risks inherent with massive gatherings, but, again, those with innovative solutions will lead the way as the events industry adapts.
The bottom line on hospitality properties and coronavirus
Human beings are adventurous and migratory by nature. People skydive, rock climb, and journey to far-off countries for pleasure, all of which are risky yet rewarding endeavors. The complications brought about by the coronavirus have added layers to the inherent risk of traveling, but hotels can take proper procedural steps to boost guest safety and build consumer confidence. People want to travel, and as restrictions ease and government support keep businesses afloat, the lodging sector should slowly recover.