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.
