COVID19 and the U.S. hotel industry: Five things we learned and five things we are still wondering

As stay-at-home orders in states across the U.S. are expiring, the first weekend in May showed strong occupancy gains for hotels in markets with beach access. STR is certainly still some time away from calling this a recovery, but the data has been decidedly “less bad” over the past three weeks. (STR is the parent company of Hotel News Now.)

So, what have we learned so far and what questions still need answers? Here is my attempt at a laundry list.

What we learned

1. This is temporary.

When the Chinese New Year travel “bump” that happens every year did not actually materialize after 25 January, we at STR knew that something was wrong with the hotel industry. We certainly did not expect COVID-19 to materialize on America’s shores with such force, but we were watching the Chinese demand evaporate and then the regional Asia/Pacific occupancy decline with growing concern.

Now that we are in the midst of the pandemic, we once again turn to China to understand how the hotel industry rebounds (leisure demand on weekends first) and what classes of hotels see the first “green shoots” (economy and midscale hotels). What we have learned from the Chinese hotel industry: This too shall pass.

2. The U.S. hotel industry sells a million room nights each night, no matter what.

This is interesting, right? We never knew this number, and we never really wanted to find out, but here we are. Last year the industry sold 1.2 billion room nights, which roughly equates to 3.5 million room nights per day (more on Saturdays, less on Sundays). Because of the first-responders, homeless populations, people driving across country, airline crews and people actually living in hotels, we now know that there is a base level of demand that never goes away, no matter the economic situation.

3. It is hard to close a hotel.

We sort of knew that, but hoped we never had to actually do it. However, even once the staff has been sent home and the doors have been locked and the lights have been switched off (aside from those awesome, heart-shaped, lit windows around the world) some costs remain. Electricity, maintenance staff, internet bills, property taxes, elevator maintenance contracts, sales staff (because, hey, the phone keeps ringing for group business in 2021) all need to be paid, even when the occupancy is zero. And, yes, someone is actually walking around flushing the toilets. Thus, the decision to actually close is hard from a financial point of view, not to speak of the HR hardships this imposes.

4. Hotel rooms make for great offices.

With offices closed and shared office spaces off-limits, hotel rooms can be a reprieve for parents who have day jobs and need a way to escape the civil war between the cat and dog, and the 4- and 6-year-olds, at home. Hotels rooms to the rescue. Exhale. Peace. Quiet. Wi-Fi. Coffeemaker. Bathroom. What else does today’s knowledge worker need? (OK, maybe a martini delivered to and left outside my door around 4:30 p.m. on a Thursday afternoon would not hurt either).

5. ‘Extend and Pretend’ lives on.

The term originated in the Great Financial Crisis of 2009 and describes the understanding between the lender and the hotel owner that this disruption is temporary and will end eventually (“Pretend”). Rather than immediately foreclosing on the hotel at the first sign of a missed interest payment, it is generally agreed that everyone is better off to allow the owner some leniency (“Extend”) and add the missed payments to the end of the loan term to make the lender whole and keep the owner in business. If interest payments start again after 90 days or so, everyone is better off. Now, to be clear, this does not work as easily in the CMBS pooled loans where Special Servicers have to play by very strict rules, but even in those cases loan modification requests are worth a try by the borrower.

So, what are we still wondering?

1. When will this end?

The consensus seems to be that there will not be a distinct ending to COVID-19, unlike the specific start around Chinese New Year (yes, some cases were reported earlier, but let’s just use this as the date when the term “COVID” entered the global conversation). The exact end can likely be pinpointed to when herd immunity is reached or when a vaccine is available globally, but the timing of this is very much up in the air and depends on which model you trust.

In the meantime, the “end” of the pandemic will be characterized by the step-by-step easing of stay-at-home orders and the slow opening of local economies. This means hoteliers cannot plan for a specific date, but rather they must plan for specific occupancies and have their plans in place to rehire staff as demand increases.

2. How many hotels will permanently close?

I said in an earlier article that I doubt the U.S. hotel industry will see a large outflow of properties and rooms. Given that the hotel industry is really a two-part business (operations and real estate), there will always be a willing buyer for a property who thinks that they can make the numbers work at the right level of discount. Last year only 15,000 rooms were permanently closed, as our data shows.

Source: STR, © 2020 CoStar Realty Information, Inc.

Even if that number doubles, that still only equates to roughly 30,000 rooms, which is the same number as closed in 2009 and only 0.6% of all 5.4 million rooms available.

3. When will group demand return?

This, to me, is the $100 billion question. Good things happen when groups return: higher F&B revenues, compression nights, higher staffing levels. Meeting planners are in intense conversations with group hotels to discuss what a meeting in “Six-Foot-World” looks like. Ballrooms used to have a fire marshal sign that dictated maximum attendance; now next to those will be a COVID-19 sign detailing how many people can be accommodated in their own 6-foot-by-6-foot areas. If that means more ballroom space is needed and the keynote event will be streamed to those, then can presentations just be streamed to people’s phones—and can those people then just stay home? I wonder.

As we all realize how productive we have become as our weeks blend into one big ZoomTeamsGotoWebex mush, I doubt small in-house training and strategy events will ever happen face to face again. The technology has gotten too good and cutting internal meetings is an easy cost-saving measure. Even once a vaccine has been developed and trade shows, association meetings and city-wide conventions return, the amount of company-internal meetings using hotels and hotel meeting space may not recover quite as quickly—or ever.

4. When will ADR recover?

Annualized U.S. average daily rate in the last two upcycles took twice as long to recover as it took to fall.

Source: STR, © 2020 CoStar Realty Information, Inc.

We have no reason to doubt this cycle will be different. We just do not know where the bottom is yet. After 9/11, annualized ADR declined for 12 months; in 2009, it fell for 19 months. Does the imply that this time the ADR decline will last an additional six months or so, or basically two years total, before the data slowly gets better? Our forecast for the next few years is clear: ADR increases are never V-shaped and will not be this time around, either.

5. Will hotels be like airlines?

Traditional housekeeping is dead. There, I said it. With the stronger emphasis on deep cleaning after a guest checks out, the pendulum on mid-stay housekeeping services is sharply swinging the other way. Billed as “keeping our guests and associates safe,” the freshening up of your room will from now be up to you. As your mom said: “Make your own darn bed.” Yes, you can request towels (via text if you please) but if you really want an attendant in your room, it will likely cost you. Same for that hot breakfast buffet. It is history. A grab-and-go bag will be available, but if you want more, you will likely pay. You see where I am going. Ryan Air says “Hi,” by the way.

In an environment in which owners are struggling to make debt service and want relief from strict brand standards, the brands will likely oblige. The question then is: Which of these offerings that used to be included in the rate will be available only as an add-on – and is therefore a new revenue driver? The answer is likely that some amenities will go away until four years from now, when a brand with a new brand standard includes it back in the rate. The amenity creep carousel will turn again.

As we go through these unprecedented times, much change has already occurred and much more change is coming our way. It will be fascinating to see which of these changes are temporary and which ones are permanent.