HotelAVE projects business recovery period similar to what followed 9/11 and the 2008 financial crisis
Hotel Asset Value Enhancement
(hotelAVE), a hotel asset management company, released a study this week estimating that it could take the U.S. hotel industry approximately five years to achieve pre COVID-19 occupancies, revenues and profitability. In addition, the hotelAVE COVID-19 Hotel Outlook predicts that the pace of the five-year recovery from the pandemic will be extended after an immediate mini-spike beginning in May or June, as the impact on the travel and hotel industry is both devastating and unprecedented.
In 2019, the hotel industry in the United States was healthy and profitable, but it had begun to decelerate prior to the outbreak of COVID-19, a main reason the recovery following the abatement of the virus will stretch out over a five-year period. Based on history, average rate discounting will be the primary drag on the recovery. It is typical that the industry discounts rates to stimulate leisure travel after a downturn. Corporations are eligible to book these lower rates in lieu of higher corporate negotiated rates and hotels will be offering concessions to groups.
"Pricing power is gone for a while until occupancies rebuild," notes Michelle Russo, hotelAVE CEO. "The industry's pre-COVID-19 challenges of above average new supply and impact of shadow supply (Airbnb and others) are new obstacles the industry did not face in prior downturns."
The hotelAVE COVID-19 Hotel Outlook analyzed the historical data of past events related to industry's recovery after a crisis or health event, including the period following the September 11th attacks, the 2008 financial crisis, the Zika outbreak in Miami and the SARS outbreak in Toronto, in order to develop the following Coronavirus recovery estimates:
In 2020, due to the rapid escalation of the COVID-19 pandemic, hotel revenues in the United States could decrease by 25 percent to 30 percent. If the progression of the virus in China and Italy is any indication, hotel occupancy in the United States will decrease to approximately 25 percent to 30 percent in March and 10 percent to 15 percent in April, or worse if hotels close either by reason of governmental mandate or financial necessity.
hotelAVE, estimates that 15 percent to 20 percent of its hotels in the United States will close temporarily by the end of March because the fixed carry costs are less than the negative cash flow projected from staying open as well as health related concerns for employees while the others are reducing services and available guest rooms to operate with a skeleton staff.
Urban locations, including Seattle, San Francisco, New York City, and Boston, are experiencing the most precipitous decline in business, primarily because of the cancellation or postponement of group functions deferred until the latter half of 2020 (for now) and local government mandates to close restaurants and limit social gatherings. Leisure markets within driving distance of travelers fared far better as travelers changed their plans from international and tourism dense locations, and a number of hotel operators are seeing new leisure bookings for the summer and fall.
"The pandemic requires that all hotels in the United States implement urgent and aggressive cost containment initiatives, including deviations from brand standards and closing food and beverage outlets, as well as instituting comprehensive cleanliness and sanitation protocols and crisis management programs," said Ms. Russo. "Hotels in the United States must not just focus their efforts, energies and resources on getting through the pandemic but, most importantly, they must prepare for the recovery from a financial, operational and marketing standpoint."
The hotel industry relies on the U.S. and global economies, and the recovery pace of these economies will determine how quickly and successfully the hotel industry rebounds. According to the Outlook, leisure hotels, especially in markets to which travelers can drive, will rebound far more quickly than group business – a sector that takes twice as long to recover. Those that geo-target for "stay-cations" and capture leisure business from their local community will rebound faster. Maintaining rate integrity and minimizing rate discounting will facilitate and expedite recovery, and key industries such as government, healthcare, legal, logistics will catalyze business travel.