Hotel occupancy is typically measured by the consistent supply of rooms, and on the surface recent numbers have been looking favorable. Occupancy was up to 49.9% in the week ended Aug. 8, up from 48.9% a week earlier, and 45.9% a month earlier.
Traditional measurements of occupancy rates are not providing the full picture of the distress in the hospitality industry.
But given that the pandemic has forced closures of many U.S. hotels, and that reported occupancy rates factor in those closures, occupancy rates are not providing the full picture of distress in the industry. Meanwhile, unless hotels are given additional financial relief, more closures will ensue, artificially inflating occupancy and making it an even less reliable metric.
The hospitality data firm STR has created a new data point, total-room-inventory occupancy, or TRIO, to factor in the temporary hotel closures. Until all temporarily closed properties have reopened, TRIO will lag occupancy. That is because room supply, its denominator, is greater than room bookings, its numerator.
For instance, U.S. occupancy for the week ended April 4 was 21.6% but TRIO for that week — the most recent for which we have TRIO data — was slightly less than 20%, showing roughly a 2% variance. Based on our review of recent numbers, we believe TRIO has continued to lag occupancy by 2% to 3%.
Snapshot of industry conditions
The view on the ground offers a sobering view. James Risoleo, chief executive of Host Hotels & Resorts Inc., the nation’s largest lodging real estate investment trust, said on a July 30 earnings call that “seven hotels in the top 20 markets Host has a presence in have reportedly closed permanently and that more of the temporary closures are expected to become permanent.” The company has opened 19 of 35 hotels that suspended operations.
Separately, Chip Rogers, chief executive of the American Hotel and Lodging Association, told Northstar Meetings Group that as many as 8,000 hotels might close by the end of September, adding, “Right now, many hotels are struggling to service their debt and keep their lights on.”
Because commercial mortgage-backed security loans are packaged together and sold as investment bonds, it is tricky for operators to receive help in the form of payment deferrals or relief. Meanwhile, the threat of increasing defaults on $90 billion of CMBS loans held by hotels is looming unless further financial assistance is provided by the government.
Nearly $16.6 billion in commercial mortgage-backed security loans were granted some form of relief through July, with the lodging and retail sectors accounting for the bulk of forbearance.
According to Bloomberg, delinquent CMBS loans in the 90+ D category are tracking at a staggering 11.42%, slightly off their level at the height of the Great Recession, which saw delinquencies reach 13.36% two years after Lehman failed. Keep in mind that this current delinquency rate has shot up in a matter of months, compared to the years it took during the Great Recession.
The scope of delinquencies in such a short period of time is staggering. New York, severely hurt by the virus, is carrying the brunt of the burden.
Permanent closures will significantly affect the supply-demand dynamics in top markets, while also presenting an opportunity for investors looking to take advantage of distressed assets.
Staffing and other reopening impediments
Even if demand justifies the reopening of temporarily shuttered hotels, staffing to meet the needs of day-to-day operations remains a challenge.
According to an AHLA survey of hotel industry owners, operators and employees from July 23 to 27, 87% of hotels report being forced to lay off or furlough staff because of COVID-19; 36% have been unable to bring any of their furloughed or laid off workers back to full-time employment, and just 37% of hotels have been able to recall at least half their full-time employees.
Only one in four hotels is back to a minimum of 60% of pre-COVID staffing levels, while 23% are still at or below 20% staffing.
Only one in four hotels is back to a minimum of 60% of pre-COVID staffing levels, while 23% are still at or below 20% staffing. Of more than 600 hotel owner respondents, more than half said that they are in danger of losing their property to foreclosure by commercial real estate lenders because of the pandemic. In short, the impact to hotel operators and employees has been devastating.
If hotel operators are able to reopen effectively with sufficient staffing, the question becomes whether consumer demand can satisfy the financial requirements to operate profitably. Many would-be customers are yearning for vacation experiences, but the reemergence of the first wave of COVID-19 has pushed adventurers back into their homes.
It’s no surprise that occupancy rates move in concert with reported U.S. COVID-19 cases, and their resulting impact on consumer confidence about safe travel.
In 2020, traditional occupancy rates were highest during the week ending Feb. 29 (64.1%) when the seven-day average for COVID-19 cases in the United States was negligible.
Rates fell to their lowest during the week ending April 11 (21.0%) when the seven-day case average was approximately 30,000 per day. Occupancy rates improved sharply through the week ending June 6 (39.3%) and have since leveled off.
Source: Bloomberg, STR, RSM US LLP
This behavior mirrors the seven-day average cases, which started growing the same week (21,621) and continued to peak through the week ending July 25 (66,335).
There are significant takeaways from this analysis: First, consumer confidence in hotels is tempered by the pandemic and second, the occupancy rate has been less volatile than case growth due to insulation of the metric by reduced total room supply. While either data point shows continued improvement, the industry is a long way from 2019 occupancy levels by any measure.
Travel sentiment is mixed
Research shows that consumers’ perception of travel safety overall appears to be improving. The Global Travel Safety Barometer for domestic travel registers at 46 out a possible 100, with 100 being the highest level of confidence, according to a July 17 survey by MMGY Travel Intelligence. But perceived safety regarding lodging was at its lowest point on April 8, the period of lowest occupancy and highest per day case growth of COVID-19 in the pandemic’s first wave.
Source: MMGY Travel Intelligence
Interestingly, perceived safety is growing at a rate consistent with case growth, potentially as a result of new hotel safety measures implemented to provide guests with consistent and comprehensive safety protocols.
While building a reputation based on safety is increasingly important, the costs of doing so cut into hotels’ already razor-thin margins. To help mitigate this margin pressure, a letter from the American Hotel and Lodging Association to congressional leaders on July 20 requested tax credits to help offset the costs of increased cleaning, employee retention and capital expenditures.
Meanwhile, consumers’ desire to travel continues to build, with many travelers around the globe planning to spend a significant amount on trips, according to American Express’ Amex Trendex, which tracks consumers, small businesses and merchants in the United States and throughout the world. The research found that 34% of Americans expect to spend $800 or more on travel in August.
The hospitality industry is not having the V-shaped recovery we all hoped for as consumer demand remains dampened by the lack of a COVID-19 vaccine. The difficulty facing investors and hotel operators regarding reopening is multifaceted and complex. At the very least, a multi-pronged focus on safety protocols, appropriate staffing and realistic scope of demand is required to assure effective and profitable reopening.
For more information on how the pandemic is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.