With the world largely staying put at home in 2020 due to the coronavirus, the travel industry has been hard-hit. Whether for work or leisure, we’re no longer hopping onto a train or plane as readily as we had before March. The hotel business has been thrown into turmoil.

The U.S. hotel industry went from posting record-breaking performance in 2019 to an unprecedented trough in 2020, with the pandemic reversing the decade-long bull-run for the sector.[1] Severely impacted by stay-at-home orders, travel restrictions, and travelers’ fears of getting sick, hotels saw occupancies plummet. This created significant financial stress for owners. By mid-April, about 16% of the U.S. hotel inventory was reportedly closed or not operating.[2] Since that low point, U.S. hotel occupancy has steadily been creeping back up, rising 17 of the last 18 weeks and ending the week of August 15th at just above 50% occupancy.[3]
But the sector continues to struggle with the rebound in demand not coming fast enough to get hotel operations to levels that will cover debt service. The decline in occupancy is being made even worse by soft prices. Revenue per available room (RevPAR) is down 46% from the same period in 2019, and the average daily rate (ADR) is down 23%.[4] Hotel owners face operating deficits, looming loan maturities and potential defaults, which are expected to give rise to distressed opportunities as forbearance agreements that were put in place at the onset of the pandemic expire later in the year. This could lead to value impairments as lenders are forced to either foreclose or sell their first mortgage positions at discounts to par. It could also lead to opportunities for funds to infuse rescue capital to fix broken capital structures.

While the recovery in the hotel sector will be difficult to predict until a vaccine or more advanced treatment is widely available, some forecasts suggest it could take up to 48 months to return to pre-COVID-19 levels (see chart below).
Where We See Opportunities (and Where We Don’t)

Regional Markets -- The First to Recover

Thus far, hotels located in drive-to regional markets have been the first to benefit from the rebound in leisure-oriented and transient demand as pandemic-related restrictions have eased. The pent-up demand to travel has manifested itself in road trips and regional travel as Americans feel that a personal vehicle is still the safest form of transportation.[5] This has meant that leisure travel is being dominated by destinations close enough to drive to from major metro areas, especially those with many outdoor activities.

Of Cadre’s 15 top growth markets[6] - selected through Cadre’s proprietary data analytics - the most attractive for potential hotel investment appear to be a subset of these regional markets that have high levels of drive-to and leisure demand and are not as dependent on corporate and group segments. Markets such as Phoenix, South Florida, Charlotte, Denver, Atlanta, and Washington are projected to be some of the fastest markets to recover, with 2023 RevPAR forecasted to exceed 2019 levels and the U.S. average as a whole.[7] Gateway markets which have traditionally enjoyed high levels of corporate, group and tourist demand, including from non-U.S. travelers, have experienced some of the largest RevPAR declines and are likely to continue to struggle. Opportunities in markets that depend on international travel and convention business will require exceptionally large discounts to replacement cost to be compelling at this time given the uncertain timing of recovery of these key demand drivers.

Corporate and Group Travel Will Be Slow to Rebound

Compared with leisure travel, corporate and group travel has been much slower to rebound, which is likely to continue for some time. Large convention and group oriented hotels are expected to be the slowest to recover as it will take time for large gatherings to resume as they did before COVID. Until the health crisis is controlled, business travel will be more limited, and it will be voluntary, based on an individual’s comfort level with travel. Employees may opt to take more day trips or cut out non-essential aspects of their travel to limit stays in hotels. What’s more, the pandemic has shown that companies can use online meetings and video calls as cost-effective substitutes for some forms of in-person meetings for which individuals would have previously stayed in hotels. For all of these reasons, while the desire for and value of person-to-person interaction and networking remains high, the recovery of corporate and group demand will likely occur at a very measured pace. Consequently, hotels that cater to these demand segments, will remain under pressure for some time.

Branded Properties Offer Security to Travelers and Investors

Even after a vaccine is available, travelers will still place high importance on cleanliness and will likely choose trusted brands over independent properties. Large hotel operators have implemented stringent cleaning protocols across their properties during the pandemic, with brands like Marriott announcing investment in sanitation technology and Hilton partnering with the maker of Lysol and Dettol products, as well as consulting with the Mayo Clinic on cleaning practices.[8] Brands also bring the added benefit of supporting marketing and sales which will be critical for driving room night demand in what will be a competitive market for guests. Amid the uncertainty and unpredictability of operating cash flow, it is prudent to invest in hotels that are new or recently renovated and therefore have limited deferred maintenance needs; executing a full repositioning strategy in the current environment adds an additional dimension of risk for which it is hard to get compensated.

Performance by Segment: Economy Hotels Lead the Way

Thus far in the pandemic, select-service economy hotels have significantly outperformed full-service upper scale and luxury hotels. Economy hotel occupancy rates were more than 2.5 times higher than luxury hotel in early May and were still leading in occupancy as of August.[9] Economy hotels have been able to tap sources of demand that have been less impacted by COVID, such as truck drivers and extended-stay guests, while luxury hotels have been hurt by lack of business, group, and international travel. Also given the relatively high fixed operating expenses of higher end hotels, many have been forced to close. Distress among these properties will likely lead to compelling acquisition opportunities for investors who can be patient and can conservatively capitalize their investment.
Silver Lining - Moderating Supply

The silver lining for the hotel industry is that net inventory should stay steady or even decrease over the next few years. New development will likely be limited going forward, and some existing supply is being converted to other uses. An estimated 25,000 rooms in New York (20% of total inventory) may never reopen, according to analysts and hotel owners.[10] Some short-term stay operators will also likely go out of business, further reducing room supply. The number of rooms under construction is decelerating from its peak in April 2020 of 220,000 rooms. While this number is still 1% higher than it was a year ago, we expect that within the next three months data may well indicate that net growth in hotel rooms is negative as rooms are taken out of service.[11] STR and Tourism Economics have already revised downward their supply forecast for 2020 and 2021 to 1.4% and 1.3% supply growth respectively, compared to their pre-COVID projections of 2% for both years.[12] With projects in the planning stage now down 10% from 2019, new supply levels will remain moderate for years to come.
Anticipating a Prolonged Recovery: Exercising Patience is a Virtue

The road to recovery for the hotel industry is going to be a long one, with a more drawn out recovery predicted than occurred during past recessions.
The ensuing distress should lead to opportunities emerging later in 2020 and early 2021 as forbearance agreements expire and there is a greater volume of loan sales, foreclosures, and owners seeking rescue capital to fix over-leveraged capital structures. Discipline around market selection and asset quality will be critical, focusing on hotels which can be acquired at deep discounts to replacement cost and where pre-COVID operations would produce a double digit cash return on the purchase price. Partnering with operators with a track record of managing distressed assets, adept at both sales & marketing and expense management, will also be important. Given the uncertainty about the depth and duration of the downturn in demand, however, there appears to be little advantage to being an early mover in the space. Opportunities will emerge, and those who exercise patience and take a stock picking approach should be rewarded.

  1. Source: STR: 2019 U.S. hotel industry posts record levels in 2019 ↩︎

  2. Source: Cushman & Wakefield: Q1 2020 US Lodging Overview, May 2020 ↩︎

  3. Source: STR: 2020 U.S. performance results for week ending August 15 ↩︎

  4. Source: STR: 2020 U.S. performance results for week ending August 15 ↩︎

  5. Source: MMGY Global: August 2020 COVID-19 Travel Insight Report, August 2020 ↩︎

  6. The Cadre 15 is a list of metropolitan statistical areas periodically identified by Cadre as commercial real estate markets with strong potential for risk-adjusted returns. The Cadre 15 is developed through a combination of quantitative and qualitative analysis, including predictive analytics and on-the-ground intel. Quantitative analysis involves forecasting two-year growth projections for each market and asset class based on various variables known to drive market appreciation including but not limited to population growth, employment, rent growth, new construction, and occupancy. Qualitative analysis involves a review of quantitative data by our industry experts. There is no guarantee that an investment in a Cadre 15 market will be successful ↩︎

  7. Source: CBRE: US Hotel Outlook July 2020, April 2020 ↩︎

  8. Source: JLL: Hotels Plan for a COVID-19-Informed Future, July 2020 ↩︎

  9. Source: McKinsey & Company: Hospitality and COVID-19: How Long Until ‘No Vacancy’ for US Hotels?, June 2020 ↩︎

  10. Source: WSJ: As New York Reopens, Many of Its Hotel Rooms Look Closed for Good, June 2020 ↩︎

  11. Source: STR: 2020 U.S. performance results for week ending August 15 ↩︎

  12. Source: Hotel News Now: US Pipeline Growing; Pandemic Could Moderate Supply, July 2020 ↩︎


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