Down but Not Out: Leisure Drives the Emerging Hotel Industry Recovery

When looking at the key performance indicators, it is clear the U.S. hotel market suffered massively through the COVID-19 pandemic. The devastating effects of COVID-19 can be seen through the decline in bookings, lack of travel and hotel closures (both temporary and permanent). Although the travel industry is no stranger to hardship, when analyzing the shock inflicted by COVID-19 compared to prior demand shocks, there is no comparison. The most significant monthly RevPAR decline during COVID-19 was 79.9% in April 2020¹. For perspective, the largest monthly RevPAR declines during 9/11 and The Great Financial Crisis were in the low 20% range, revealing declines following COVID-19 more than three times greater.

At the outset of the COVID-19 shock, HVS forecasted that ADR would take up to four years to recover to 2019 levels as a lower rate was assumed to be used to stimulate demand.² Starting in late 1Q 2021, the U.S. hotel and hospitality industry experienced a much-needed surge in travel from the leisure sector in vacation destination markets, which is expected to continue for the foreseeable future. As a result, ADR has been in line with 2019, and in some cases higher than 2019, for a collection of hotels that Bellwether Asset Management oversees. Looking forward, by the end of 2022, we expect leisure hotels in vacation destination markets to have largely surpassed pre-COVID performance. However, due to the continued re-scheduling of corporate events into 2022 and 2023 and reduced capacity when such events have occurred in 2021, we expect that corporate demand will lag through 2021, and big-box group hotels are expected to take longer to fully recover to pre-COVID levels by the end of 2023.

Despite the unprecedented COVID-19 demand shock, best-in-class hotel owners and operators used the crisis strategically as an opportunity to accelerate capital projects and to adjust stabilized operating budgets. One example of operating efficiency has been to further normalize the reduced frequency of housekeeping services that started during the pandemic with guests preferring to have rooms cleaned less frequently to limit the number of people in their room. Not only does this reduce operating expenses, but also provides positive environmental impacts for ESG scorecards. Furthermore, with employment still down 2.2 million jobs below its February 2020 level, hotel owners and operators have been able to evaluate and reset their go-forward staffing requirements coming out of the crisis.³

Distress also became a significant theme during the height of the COVID-19 pandemic as topline revenue plunged. Operators were forced to find means other than operating income to cover fixed costs and make mortgage payments. According to Trepp, the lodging loan delinquency rate reached a record high of 24.3% in June 2020 and could have continued to increase; however, lenders, servicers, equity investors and operators generally elected to work together to bridge the pandemic shock, and accordingly delinquencies have declined every month since.

This unprecedented cooperation was due to a variety of factors, including: (i) the nature and speed of the pandemic shock, (ii) sound fundamentals, including a prudent capital approach entering the pandemic, and (iii) cap rate compression enabling assets to hold value. With this foundation, capital providers and operators worked together through the release of reserves, approval of reasonable forbearance requests, modest additional capital advances and other collaborative workout structures. We continue to monitor the industry for additional distress; however, any distress going forward is expected to be within narrow segments (e.g., big box, group hotels) or due to idiosyncratic problems for specific properties rather than industry wide.

Fig. 3 – Month-Over-Month Loan Deliquency Rates by Major Property Type

Emerging trends reveal differences in recovery speed for not only different product types, but locations as well. Travelers are taking advantage of the outdoor amenities the resort-style properties have to offer with destination properties in cities like Los Cabos and Cancun reserved at full occupancy.⁴ Popular leisure destinations like Las Vegas and Orlando as well as the smaller, less-dense drive-to markets continue to benefit from the pent-up vacation demand and positive consumer sentiment driving the hospitality recovery of 2021. Additionally, vacationers looking to escape after almost two years of lockdown are enjoying areas like Hawaii and Mexico as occupancy continues to increase during the summer months.

In fact, Hawaii’s demand has been so robust that officials in Maui are working to implement a new tax surcharge on tourists. This new law will allow counties to collect a 3% tax from visitors staying at hotels and other short-term rentals on top of the current 10% hotel tax. Along with the new surcharge, the state also passed a bill that changes how Hawaii allocates tax revenue to the different counties based on tourists per capita. Pressure from the locals had officials moving quickly on implanting this new system as islands like Maui have become overrun with tourists without seeing the proper increases in revenue. Hopefully with this new tax, both local communities and Hawaii’s economy can benefit from the healthy increase in travel. Although markets like Hawaii are benefiting from the increases in tourism, other markets are struggling to gain the same visitor momentum.

In contrast, gateway markets with a heavy reliance on business and group travel are experiencing some of the most significant declines in RevPAR in modern history, according to PWC. New York’s lodging market has been hit particularly hard, with 20% of the state’s total hotel supply potentially closing permanently.⁵ Within Manhattan, luxury and upper-scale tiers were disproportionately impacted given their high operating cost structures, with room closures during COVID-19 at 76% and 70%, respectively.⁶ Given 2021’s rescheduling of group events into 2022 and 2023 and the conservative outlook on corporate travel, big-box hotels dependent on group business are not forecast to start recovering until 2022.

The rollout of the vaccines, traveler sentiment and pent-up demand are the most vital factors driving the hotel and lodging sector’s recovery from the COVID-19 pandemic. Hoteliers have identified the importance of mass vaccine distribution and are taking steps to help lead vaccination efforts. To accelerate the industry’s recovery, AHLA urged public officials to use hotels for vaccine distribution. In January 2021, the association issued a letter to the Biden-Harris transition team, offering to mobilize its network of more than 50,000 properties across the U.S. for vaccination sites.⁷ With over 154 million or 57% of Americans fully vaccinated as of June 2021, travel plans continue to increase.⁸

As vaccination efforts continue, there is a positive correlation between consumer sentiment and comfort towards traveling. According to the U.S. Travel Association, more than three-quarters or 77% of American travelers plan to travel this summer. In addition to being vaccinated, the most significant influence driving Americans to travel is pent-up demand. As of June 2021, CoStar shows demand at 90% or more of 2019 levels thanks to leisure travel and many travelers also find themselves with travel vouchers from trips canceled due to the pandemic. It was estimated that by the end of 2020, U.S. travelers alone were holding $10 billion in outstanding flight vouchers.⁹ Because airlines were providing travel vouchers instead of cash refunds, travelers are forced to either leave money on the table or use the vouchers and travel – which should produce a positive demand driver for the lodging industry.

The reopening of the economy is leading to the rescheduling of corporate events. Events planned for 2020 and pushed into 2021 are slowly beginning to occur (albeit with tentative first steps, limited capacity), while other events get pushed into 2022 and 2023. Properties designed to attract corporate events tracked by Bellwether Asset Management have seen a mixture of events going off as planned in 2021, with others pushed into 2022 and 2023. Accordingly, event planners are already finding it more challenging to schedule in 2022 as the pushed-out corporate bookings compete with the annual events already on the books.

Looking forward, we expect leisure hotels in vacation destination markets to continue to surpass pre-COVID 2019 performance significantly. In comparison, however, we expect it to take longer for large box group hotels to achieve full recovery to pre-COVID 2019 levels. The hotel industry is strong and resilient, as illustrated by the recovery in leisure travel earlier this year. Human nature craves interaction, and after a year and a half of being stifled, the pent-up demand is real.

Recovery will come but will occur in waves, depending on segment and geography. Travel demand will look different as the leisure and group segments take two separate paths toward recovery. The vaccine rollout is a critical component in restoring travel sentiment as industry leaders stay proactive and connected as they bring the hotel sector back to life. Innovation is essential as consumer preferences continue to evolve, emphasizing continued health and hygiene measures to ensure safe experiences for all travelers, which in turn provides opportunity for best-in-class hoteliers to evaluate and implement measures that meet evolving consumer demand.

COVID-19 has brought the crucial role travel plays in both the global economy and our personal lives to the surface. While the COVID-19 pandemic created a truly abysmal year of distress in hotel operations, pent-up demand for the leisure travel sector kicked-off the hotel recovery and has provided a foundation for growth. As with each prior recession, the industry has learned new and better ways to operate and will be stronger as a result. Fundamentally, humans not only want to see each other again, we long to get back out into the world – and “Zooming” is no substitute.