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A Look at the Post-COVID Recovery of the Hotel Industry

masked woman in hotel lobby

The pandemic is severely challenging the hotel industry, and a bounce-back could take some time.

Although the pandemic is causing massive economic disruption and putting numerous sectors in trouble, perhaps no industry is experiencing more significant challenges than hospitality. Consumers aren’t traveling anywhere near pre-COVID levels despite the lift of initial travel restrictions, putting a severe strain on businesses in this sector.

Most notably, the hotel industry is struggling, as vacancies remain higher than usual in most cities and don’t show signs of returning to pre-pandemic levels. The revenue per available hotel room decreased 50% between 2019 and 2020, and about 25% of all hotels in the country are at risk of foreclosure.

Here’s a look at what the future could hold for the hotel industry and how quickly it may recover once the majority of the population receives a vaccine.

All hotels rely on travel—but different types of it

The hotel industry depends on people traveling, of course. But a more in-depth analysis considers why people visit specific destinations.

Many Florida destinations run on tourism as visitors head to the beaches to enjoy the sun. But the central business district in Miami, for example, is far more reliant on business travel, whereas hotels near South Beach cater to the party crowd. As a result, different properties may recover at different rates. 

Many companies still have the money to spend on travel. But will business travel completely bounce back in a rush to return to face-to-face meetings once restrictions lift? Or will continued employee reluctance and the newfound reliance on virtual conferences and saving on travel expenses endure?

On the other side of things, recreation may be durably impacted by nationwide job losses. Despite the public wanting to travel, the money might not be there for many aiming to do it. A broad economic recovery—including an unemployment rate near pre-pandemic levels—may be necessary to increase vacation spending dramatically.

Luxury properties are the hardest hit

One trend worth noting in the hotel industry is that luxury properties have experienced the most significant occupancy decreases. 

This makes sense, given that travelers are more likely to opt for a luxury hotel on vacation than they are on business or when just passing through a city and stopping in for a night or two. 

In May, luxury hotels were operating at 15% of capacity, compared to economy hotels at 40%. These numbers suggest that the clientele that economy hotels rely on, such as truck drivers and extended-stay guests, are still using hotels at significant levels. Tourists, on the other hand, are not. And these figures signal that the luxury hotel industry could take longer to fully recover.

Some locations are worse than others

Another factor to consider in the recovery is where a property is located. Hotels in large, fly-in cities like New York and San Francisco are harder hit than beachfront locations like Fort Lauderdale, Charleston, and Myrtle Beach.

The reason: large segments of the population can drive to Fort Lauderdale, Charleston, and Myrtle Beach to spend the weekend lounging on the beach. Destination cities were far more reliant on fly-in guests, and many people still avoid air travel because of COVID risk. 

However, small, vacation-friendly cities with large urban populations within driving distance saw decent tourism numbers last summer. These properties could bounce back before air travel returns to pre-pandemic rates.

How recovery might look

The hotel industry’s recovery could take many different forms, as much of it relies on how quickly the vaccine rollout occurs. There’s also the question of whether or not the vaccines will work against new COVID variants, as virus mutations have the potential to extend the pandemic—on some level—indefinitely.

Realistically, a full COVID recovery could take years. S&P Global Ratings put out a report in November suggesting that the downturn in U.S. lodging could last until 2023. There are many reasons for an extended recovery period, with the simplest being that many travelers may spend their money more carefully for some time. 

It’ll also take some time for concerts, conventions, sporting events, and other mass gatherings to become normal again. Even with a vaccine, many individuals could remain hesitant to gather in crowds, staying close to home for the short term.

Evaluating the hospitality industry and the CRE implications

We don’t know when tourism and hospitality will fully recover. And some properties will never bounce back from the lost income. If the current downturn lasts until 2023, many more hotels will be forced out of business, a trend that could be particularly common with luxury hotels.

However, there is a reason for some optimism—the federal government plans to vaccinate 1.5 million people per day. This pace would see 150 million doses administrated by early May, taking the country significantly closer to the herd-immunity threshold. Those numbers could improve further as easier-to-distribute vaccines receive final approval, and a return to normal could be here by summer. Nevertheless, the hotel industry is undoubtedly in for more of a struggle.  

Morris Southeast Group is closely following the economy and can offer insight into the hospitality sector and other CRE areas. You can contact us to learn more by calling 954.474.1776. You can also speak with Ken Morris directly at 954.240.4400 or kenmorris@morrissegroup.com.

Does the Hotelization of Offices Work in the Age of COVID?

kitchen in an office

More services and amenities could be the key to attracting tenants. But the difficulty of obtaining capital for customized improvements puts up barriers to “hotelizing” offices.

COVID-19 is speeding up the work-from-home revolution, as more employees are avoiding the office and working remotely than ever before. 

Pew Research Center reports that 71% of workers with the ability to complete their duties remotely are doing so, and 54% of them want to continue working from home after the pandemic. This number shows an increase from the 20% of employees working from home before COVID-19, indicating a durable shift in the work environment. 

Regardless of the stats, many employers will require workers to return to the office after a complete vaccine rollout. But there could be resistance from individuals who have become accustomed to the convenience and amenities of working from home. 

This may spur a second look at “hotelizing” the office, which involves bringing many of the amenities found in hotels—and the home—into the workplace.

What is the hotelization of an office, exactly?

To understand the concept, consider the amenities that most hotels contain. 

For starters, there’s often a grand lobby with comfortable furniture and plenty of places to relax. Adding cozy couches, sturdy coffee tables, high-end décor, and classy flooring creates an upscale atmosphere that can make the office seem more like a “destination.”

The furniture in a hotel lobby is often well-spaced to offer privacy. And such spacing is an essential trait in the post-COVID world, given social distancing requirements. Including comfortable furniture also provides casual locations for meetings, helping employees feel more relaxed at work. 

Next, think about the other amenities a hotel offers. There’s likely a fitness facility somewhere in the building, perhaps a salon, and rooms that have a full kitchen and dining area, as well. Adding these features to an office is beneficial for many reasons, chiefly saving employees time and money.

Workers who can stop at an onsite gym before or after work may reclaim another hour from their day. A kitchen provides the opportunity to cook a quick meal and avoid eating out. And various other amenities, from dry cleaning services to hair-care options, offer similar benefits.

The cost-savings and convenience of these facilities could be a significant factor in attracting new employees and retaining current ones, as well as attracting the tenants who need these workers.

As always, location matters

When someone books a hotel room, they usually choose a building close to their desired activities in that city. Getting into vehicles and driving to destinations is often a non-starter, so they’ll reserve a space within walking distance.

Businesses often take the same approach when selecting office space by leasing properties close to desired amenities. A location ideally has numerous restaurants, service businesses, and fitness centers nearby while providing plenty of parking or public transportation access—all of which reduce the need to hotelize the business property itself.

For investors, looking at what’s close to the structure is often just as important as the building itself. The goal is to provide as many convenient at-home amenities as possible to attract tenants.

The impact of shorter leases on access to capital and hotelization

Things that stand in the way of the extensive property improvements required to hotelize a space are economic uncertainty, the trend toward shorter leases, and stricter access to capital, despite extremely low interest rates.  

Companies are increasingly looking at short-term leases, making it financially unfeasible for building owners to significantly retrofit a building for potential tenants. Lenders are taking a hard look at the possible ROI of a project and the leases that underlie it to hedge their risk. And there is no sense in spending significant time and money to hotelize a space if enough tenants won’t commit long term.

One solution may involve creating flexible spaces or going with a hybrid model. For example, a large office building may have one or several long-term tenants on the upper floors, temporary space-as-a-service offices on the lower levels, and kitchen, dining, fitness, and other facilities on the bottom floors. 

The long-term tenants defray the risk while reaping the amenities, which also attract shorter-term tenants—possibly co-working spaces. The amenities are common areas for all lessees, defraying the expense in proportion to the potential ROI. And the on-demand office areas can provide additional office or meeting space for long-term tenants when they need it, increasing flexibility as more employees return to work. 

Looking to the future

While it’s impossible to tell precisely how the economic recovery and post-COVID return to the office will shake out, we know that many employees love working from home—and some may never look back from the experience. At-home-like workplace amenities could make the return more palatable, plus attract new tenants and the new employees they need. 

Regardless, the customization required for hotelization is held up by shifting and reduced overall demand for office space in some areas, along with the trend toward shorter leases as businesses navigate an uncertain environment. Individual situations and needs will vary, but we suspect much of the hotelization trend will be put on the back burner until the pandemic’s aftermath becomes clearer. 

The commercial real estate landscape is quickly evolving as we’re going through an unprecedented period of volatility. At Morris Southeast Group, we have our eyes on the situation and can help investors and tenants navigate the present and future of CRE. Contact us at 954.474.1776 to learn more. You can also reach out to Ken Morris directly at 954.240.4400 or kenmorris@morrissegroup.com.

Is the Open Office Concept a Thing of the Past?

employees in open office

The need for social distancing is sure to amplify many pre-pandemic questions about the efficiency of open offices.

The open-concept office is widespread in corporate America, though it has taken some hits in recent years. The movement first gained traction in the 1970s and remains a go-to setup for many businesses around the country.

The reason behind this popularity is that these layouts maximize the use of space and can save on costs, plus spur collaboration. The idea is that workers can’t hide in their offices all day and must interact with colleagues, improving teamwork and productivity.

But research suggests that these setups sometimes do the exact opposite, as employees learn new ways of avoiding each other and the distractions that come with an open office. COVID-19 is also creating fundamental issues for the concept, given that physical barriers are crucial for maintaining social distancing.

Here’s a look at the present and future of the open office—and how commercial real estate owners can adapt to businesses’ ever-changing needs.

Despite their promise, open offices might not drive interaction

Even before the pandemic, there were growing questions about the viability of the open-concept office. Managers noted that employees could deflect interaction in an open setting just as quickly as they could in a cubicle or closed office by using headphones, pretending to be busy, and avoiding eye contact.

In fact, the Harvard Business Review reports that some firms have witnessed face-to-face interactions drop by 70% after switching to open offices, suggesting that this type of space isn’t meeting its objective. Employees make up for the decrease in face-to-face interaction through electronic communication, despite having the ability to speak in-person.

Keep in mind that these numbers are from before COVID-19. Living through a pandemic has changed office interaction even further or eliminated it altogether, at least in the short term.

The impact of COVID-19

Of course, we live in a different world than we did a year ago. And it doesn’t look like we’ll return to normal for some time. Even after a successful COVID-19 vaccine rollout, we could see new strains of the virus make the office a stressful place to be. 

There are currently social distancing protocols in most offices that make collaboration more challenging. Physical barriers are necessary to stop the spread of the virus within the workplace, further reducing the viability of open offices. For example, many desks or workspaces now have plexiglass barriers between them. Employees can see each other but not interact closely, defeating an open office’s intended purpose.

There’s also the possibility of many employees demanding a closed-off work environment as they return to the office. Workers want to stay healthy, which means limiting the extent to which they physically interact with others.

What these changes mean for CRE

From a commercial real estate perspective, adaptability is essential. We can no longer assume that companies will want open-concept offices because they may be an outdated or even dangerous format as workplaces reopen.

CRE owners should be aware that organizations will want different things from their office space and maintain the flexibility to adapt. This could include renovating space to allow for more room between employees or, in more extreme cases, building out exclusively closed offices.

Organizations that continue to use open concepts need physical barriers in place, at least near-term. Plexiglass might work in some situations, while other offices might want cubicles or other barriers to further separate their staff. Then there are cleaning protocols, foot-traffic procedures, and growing demand for HVAC improvements. Since the virus primarily spreads through airborne transmission, a new focus has been placed on buildings’ air quality. For a thorough rundown of these safety issues and potential property improvements, read our previous blog.

We’re going through an unprecedented period of change in the traditional office setting. Keeping up to date on the trends could be the difference between renting a space and having it sit empty.

What the future holds

We’re not exactly sure how office space will evolve nor how durable specific trends will be. Much depends on the vaccines’ efficacy at fighting new variants of the virus and what particular companies and their employees prefer. If workers remain uncomfortable returning to open-concept offices, organizations and building owners will have little choice but to rework the spaces.

Commercial real estate owners should be aware that businesses could be looking for different things in the coming months and years and stay willing to adapt. More flexible setups — or owners who are willing and able to renovate to meet individual preferences — will attract new tenants faster. But certain offices in select areas may struggle to attract renters, regardless of the setup.

One thing is for sure: 2021 will be a pivotal year that will continue to introduce novel challenges in the commercial real estate landscape. And the ability to adapt will remain essential.

Morris Southeast Group has its eyes on these CRE trends and is dedicated to keeping our readers, clients, and colleagues informed. For more information on trends in office space or to lease or to find a property that is right for you, contact us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or by email at kenmorris@morrissegroup.com

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