To say that 2020 was a terrible year for the hotel industry is no understatement. In fact, it may have been the worst on record.
While the COVID-19 pandemic wreaked havoc on the world in so many ways, the hospitality industry was especially hit hard by the travel restrictions and social-distancing protocols introduced by national, state and local governments.
“Obviously, 2020, to put it bluntly, was a horror show,” said David Eisen, director of hotel intelligence, Americas, HotStats. “January and February were OK in terms of looking at it on a revenue basis, on a profitability basis, then everything just fell off the cliff as of April. April was the nadir; that was the lowest point for the industry as it relates to every KPI that we track.”
But, he said, from that April low-point, globally, the industry began a comeback that will hopefully continue into the new year. “The global hotel industry by the numbers felt the sting of the coronavirus in a procession: Asia first, then the rest of the world,” he said. “The damage was swift and pernicious, halting demand and, subsequently, demolishing revenue and drying up bottom lines. Since April, the hotel industry’s recovery has been measured in baby steps—month to month, rather than year over year, which is the norm. The good news is that from that April trough, both revenue and profit have been on an ascent, with some blips along the way.”
While the only prediction for 2020 that was accurate was that all of the predictions might be disrupted by a “black swan” event, many of the experts that Hotel Business spoke with believe that 2021 will be very much a tale of two different years—and much of that has to do with the rollout of the COVID-19 vaccines.
“I think it is really going to be like two separate, distinct years,” said Chip Rogers, president/CEO, American Hotel & Lodging Association (AHLA). “The first half of 2021 is, perhaps, going to be even worse than what we experienced throughout 2020. I do think that once we hit late May, early June, you are going to see the recovery begin in full force. And I think the second half of 2021 is going to give people a lot of hope.”
According to Cindy Estis Green, CEO/cofounder, Kalibri Labs, the first half of the year looks much the same as most of 2020. “When we did our forecast for ’21, we saw for the first two quarters—just looking at RevPAR comparison of what our ’21 looks like compared to ’19—down by 47% in Q1 and 45% in Q2,” she said. “We see the first half being pretty muted. Q2 is going to be considerably better than last year, but I am talking compared to a reference year like 2019.”
Bram Gallagher, senior economist, CBRE Hotels’ Americas Research, agreed with this assessment. “In the short run, Q1 and Q2 are going to look rough,” he said. “They are going to look similar to Q3 and Q4 of 2020… Our expectations were sort of a gradual improvement over time. That was our baseline scenario, but with this new surge in infections, we have seen a stalling of performance since October or November in our weekly data—a little worsening in performance from some of the higher occupancies and even rates that we saw in September.”
He continued, “What we are forecasting is it is really going to be pretty stagnant for Q1. There is maybe going to be some improvement in Q2—there are some seasonal effects, but there is a lot of pent-up demand. We really need to see the vaccine being distributed widely, and also see its effectiveness in the groups who are receiving the vaccine.”
Estis Green sees the improvement starting as spring break begins—with a caveat. “I think Q2 is going to start picking up a little because of spring break, if things get better,” she said. “But we have had these recent spikes in infection rates, and it is still going to have a ripple effect from the holidays, where they are talking about peak infection rates by the third or fourth week of January, which is rendering everything difficult.”
While the winter is going to continue to be difficult, J.P. Ford, SVP/director of global business development, Lodging Econometrics, is bullish on the industry for the year, with things picking up in the spring. “This winter is going to be tough,” he said. “Then what is going to happen is mid-spring, late-spring, we are going to begin to see some green shoots. Then this summer and fall—especially more towards the middle of the summer rather than the fall—I think that is when travel is really going to begin to pick up. I think conferences and trade shows will largely be able to return to some semblance of normalcy.”
Estis Green said that Q3 should be “considerably” better than last year. “Right now, we are looking about 38% down from 2019,” she said. “In Q4, we see it improving a little bit, but we don’t see massive ‘hockey stick’ growth in Q3 and Q4. It is going to be much more muted, just because of the delay in all of these factors having to ripple through the marketplace before the hotel industry is going to get the benefit of that.”
Another factor that may help in the second half of 2021 is that the hotel industry has a previous season of experience with socially distanced travel. “They will do better as a result of the experience they’ve had,” she said. “People are putting back their staffs and re-establishing new organizations within the revenue sphere, as far as their sales and marketing activities. They are much more systematic about going after the business. They are gearing up to focus more on the leisure side, whereas many management companies and brands were so focused on group and corporate business because it made up so much of a part of the overall demand for the hotel business. We will be better at converting demand.”
Rogers agreed. “No question about it,” he said. “Everyone was doing something that had never been done before, and now that we’ve been through it for going on a year—including a summer where there was decent leisure travel—I think people are going to be much better prepared. And, hopefully, that preparation will pay off in addition to having a traveling population that, for the most part, has probably been vaccinated. I think the combination of the two is really going to help on the leisure travel side this summer.”
Again, what will be a significant factor is the successful distribution of the COVID-19 vaccines. “Once it has been demonstrated that the vaccine is effective, then people will start making plans,” said Gallagher. “Those plans will take effect over Q3 2021 and on, and I think a lot of that will be realized at the end of 2021 and the end of ’22.”
What will also help is increased testing and the development of accurate rapid tests. “If we had a rapid test that was reliable, that was like a saliva test, breathalyzer or some five-minute kind of thing where accurate results were available within 10 or 15 minutes, I feel like it would put everyone back on the road again,” said Estis Green. “It would get people in restaurants. It would get people on airplanes, and it would get them into hotels. Everyone would be confident that anyone who checked in had to be tested or would have to prove that they were vaccinated.”
She continued, “We are going to have an extended period where people either won’t get the vaccine or can’t get the vaccine, and it may take us the next 12 or 18 months before we reach critical mass. It could even go beyond that if there are mutations or things change. I think we need to have testing in conjunction with that. If we have rapid testing that is reliable, vaccinations and people still wear masks on airplanes and in public spaces—combined, of course, with social distancing—I think people would be OK with going out.”
Just as it did in 2020, leisure travel is expected to continue to lead the way for the industry. “I think leisure travel will begin to ramp up late spring, and I think you will see a lot of people take some vacation time in the summer and in the fall,” said Ford. “I expect leisure travel to outpace business travel for the first half of ’21 and maybe even the first three quarters of ’21.”
Gallagher pointed to an interesting statistic from this past November to illustrate the thirst for leisure travel. “In November, if we are looking at hotel ADR, we are looking at a segment that had an increasing ADR in November 2020 versus 2019—and that was the resort segment,” he said. “All of the other types of hotels have much lower rates than they had in 2019. But we actually saw a little bit of rate improvement among the resort groups.”
He continued, “For the locations that can accommodate guests safely and reassure them that it’s going to be a safe experience, there is still a lot of demand. There is willingness to pay and that is a big difference in this downturn compared to the Great Recession, where rates had to be slashed to attract people back to the hotels. We’re talking about the leisure traveler, the people wanting to get out, get away from it.”
That leisure demand will not be going away, according to Gallagher. “The resorts that we have seen do well are those in the secondary markets, off the beaten path in a little bit less densely populated place,” he said. “I think this just really illustrates that people do want to get out. Savings rates are really high right now. People are paying down debt. They are shoring up their wealth position and, to some extent, they don’t have anywhere to spend their money. But I think that once the hotels are safe, that is going to put people in a comfortable position economically to be able to travel to take advantage of hotel reopenings.”
Corporate and group travel
While leisure will lead the way for Q3 and beyond, corporate travel will take longer, according to the experts. “Business travel is a really important segment as well, and I think that is going to take longer,” said Gallagher. “I think businesses will be more conservative in scheduling travel. I am bullish on travel in the long-term, but with budgets being as they are—and the travel budget is going to be a little bit lower for businesses in 2021—business travel is going to take a little bit longer to take off.”
Kalibri Labs’ Estis Green agreed. “The delays in getting the vaccinations out everywhere—it is just moving more slowly than people want,” she said. “For business to come back, getting another 20 million people vaccinated is not going to be enough. The corporate accounts still have to agree to send their people out on the road. Right now, they are happy to save money and keep doing what they’ve been doing and being very selective about the traveling that they do.”
For AHLA’s Rogers, a key factor for increasing corporate travel—and something his organization will continue to work towards—is liability protection for businesses going forward. “We still have some concerns about Congress not passing liability protection because we are hearing from lot of businesses that they have some fears of sending their people back out traveling without any protection,” he said. “But the good news is: Where Congress has failed to do its job, the states seem to be doing their jobs. There are 13 states [as of publication]that have passed liability protection, and we expect another handful to do that here over the next couple of months as legislatures have gone back in session.”
Even when the companies and their employees feel comfortable enough to travel, it won’t just start immediately. “In each municipality, in each state, in each county, there are going to be different rules about what is and what isn’t allowed—and when the restrictions will begin to be lifted,” said Estis Green. “Then you have the lead time of people booking their meetings. The restrictions may be lifted, but it doesn’t mean that meetings are going to start pouring in the next day. I think the first half is going to be a continuation of 2020, not much better.”
Gallagher said that some convention and visitors’ bureaus are already working in anticipation of a pickup in the second half of the year. “I have been talking to convention and visitors’ bureaus from many different markets and there are some that are really trying to take advantage of that,” he said. “I am based in Atlanta, and the Atlanta CVB is really trying to take advantage of this 2021 conference season hoping to get a lot of pre-bookings. It is hoping to get people out there as much as, say, 85% of 2019 levels. It is really trying to get that going.”
Secondary markets might present an opportunity for the conference and convention business. “Some of the biggest conference markets—Chicago, New York, San Francisco—still have a really high rate of hotel closures, not taking reservations, not really anticipating a lot of business this upcoming season, so some of these other markets are really trying to take advantage of it,” he noted. “Atlanta, for instance, does have most of its hotel rooms open. A lot of places have a lot of hotel rooms open. Even some big markets like Miami, which have traditionally depended on international travel, which, of course, has been slashed, have a much larger proportion of its hotels reopened than some of those other markets. There are some places that are trying to jump on this 2021 season. I think they are going to do well.”
Variations in markets will affect the entire travel industry, not just the convention and group market. “The biggest point that I have seen in the data is that there is such variation by market and submarket,” said Estis Green. “Everyone wants to talk like it is a normal downturn and it isn’t. When will the hotel industry be back? There are parts of it that will be back in early 2022. It is not that far out. Then there are parts that are not going to be back until late 2024 or early ’25. There is huge variation.”
She continued, “The industry has to be looked at in a more granular way as a result of the unusual nature of the impact of COVID. It affected business in a way that economic downturns don’t do. A huge drop in the biggest demand drivers in our business, which is corporate and the group business, we have to know what the nature of that demand is in every market and submarket. We have to know as it comes back, that most people say it may not come back the same. I think that is true.”
“People want to be out on the road, and they need to be out on the road, especially for sales calls and that sort of thing,” Estis Green added. “I think we will take a hit of maybe 15% or 20% in the short term. Then the economy will grow, and we’ll end up back to the volumes that we were at. It will just take a couple more years.”
The chain scales will also be affected in different ways in 2021.
One segment that did relatively well in 2020 was extended-stay, and Ford expects that to continue into 2021. “I have high hopes,” he said. “I am encouraged by the extended-stay segment. It performed well at the operating level in 2020. People wanted more room. They wanted the ability to cook in their own unit for a variety of reasons. In 2020, we were isolated. If you are going to be isolated, you are going to want all of the comforts close to you because you really don’t have a desire to get out. So, everything that you need to sustain your daily life, you are looking for that in a hotel room. You may have laundry down the hall. You have all of your cooking facilities there with you. So, you can see why extended-stay worked out pretty well.”
He said that the conditions that made the extended-stay category so popular in 2020 will continue into the new year. “There is going to be—even as we are ramping up vaccinations here in the U.S.—some continuation of that, as well. It is not like people are going to go get vaccinated and they are just going to feel all of the freedom that they felt in 2018 and 2019. There is still going to be some hesitation. There is still going to be some pullback. There is still going to be some wonderment with people. I think the mindset of people is that we are going to want the extended-stay or the suite-type environment, and I think it works well.”
Ford is also bullish on the economy segment, which is projected to open 27 properties with 2,338 rooms, a growth of 0.3% by rooms. “Some of the same factors that apply for extended-stay, we can say about economy as well,” he said. “There is still some uncertainty in people’s pocketbooks, but at the same time, we need to get out. We are still human creatures. If people are going to do that, they are more likely to look more towards a lower-priced product. I think at the operating level, you are going to see the economy segment perform pretty well going forward into 2021.”
“The lower tier (economy and midscale hotels) performed far better than other hotel types in 2020, running between 67% to 77% of 2019 RevPAR,” said Estis Green. “Their recovery for 2021 will be similar with the expected RevPAR to be at 83% of 2019 performance for economy and 75% of 2019 RevPAR for midscale hotels. The middle tier ran middle-of-the-pack for 2020 and is expected to be in the same position for 2021. Upper-midscale hotels are forecast to finish 2021 at 66% of 2019 RevPAR with upscale hotels at 58% of 2019 levels.”
Lodging Econometrics expects the midscale and upper-midscale segments to have the most openings in 2021, with upper-midscale expected to open 384 properties with 38,434 rooms (a 3.3% increase in rooms), and midscale forecast for 118 openings with 9,477 rooms (a 2.2% increase in rooms). “It has been that way for years through this lodging development cycle that we have been in,” said Ford. “The upscale and the upper-midscale chain scales have produced the most hotel openings for many years. I expect that to continue.”
Many of the brands in these two chain scales are very well favored by developers. “It is because those brands have wide consumer acceptance,” he said. “They are relatively easy to run, rather than a full, big-box, urban-center hotel. Lenders like to lend on them because they have strong backing from the franchise parent companies. They have strong reservation systems, and many of them are newer. From a development perspective, lenders can get very comfortable providing construction loans on those types of assets. They have very manageable food and beverage components.”
Gallagher has a mixed outlook for the luxury and upper-upscale segments. “Luxury hotels have seen impressive ADR recovery, with the chain scale as a whole achieving above 80% of 2019 levels,” he said. “On the other hand, these hotels are also seeing the highest rate of closure, with approximately 15% of luxury rooms closed. Occupancies have been hard hit in this sector, too, with occupancy at below 20%.”
Estis Green added, “The upper tier took the biggest hit in 2020 with RevPAR at about one-third of 2019 levels, and both luxury and upper-upscale hotels are expected to recover in 2021 to about 46% of 2019 levels.”
Ford said that while people may be willing to pay more because they are going to be comfortable with safety protocols at a luxury or upper-upscale facility, those located in urban centers may not fare as well. “The other thing we have to factor in, too, is that outside of resorts, you find most of your luxury and upper-upscale properties are in key urban centers,” he said. “Urban centers have not come back across the U.S. I know many of those luxury and upper-upscale hotels have opened; however, many of them are experiencing very low occupancies, ADRs and RevPARs. There is a lot of supply in terms of guestrooms, but the demand has not caught up to existing supply.”
Gallagher agreed. “Upper-upscale hotels, which encompass many convention and conference hotels, have been the hardest hit,” he said. “RevPAR in this scale is only a few dollars more than the economy/midscale aggregate. We expect this scale to return to 2019 nominal RevPAR later than the industry as a whole, perhaps in 2025.”
Lodging Econometrics forecasts that openings in the luxury segment will grow 3% by rooms in 2021, with 18 projects and 4,536 rooms. Upper-upscale is forecast to grow only 1.6% in new rooms, with 50 projects and 10,244 rooms.
In terms of new-builds, Lodging Econometrics’ Ford doesn’t see a big drop-off for the year, forecasting 929 projects with 107,407 rooms to open by the end of 2021. That represents a 1.9% increase in new hotel supply.
Projects scheduled to start construction in the next 12 months total 2,015 projects with 234,703 rooms, down 12% by projects and 11% by rooms year over year. Projects in the early planning stage stand at 1,714 projects/215,819 rooms, a cyclical high in the number of rooms, and up slightly year-over-year.
“When I look at the end of the third quarter of 2020 and I compare it to the end of the third quarter of 2019, we are down 7% by the number of projects, and 6% by the number of rooms,” he said. “Developers are taking a wait-and-see attitude. Certainly, there have been some cancellations. There have been some postponements, but not to the degree that we saw in the Great Recession of 2008 and ’09, when cancellations and postponements were rampant.”
CBRE’s Gallagher agreed. “An interesting thing that we have noticed is on the supply side, when the COVID outbreak first came out, we heard a lot about construction stops,” he said. “We heard about projects that were under construction perhaps being canceled. As time has gone on, that hasn’t really occurred. Pretty much everything that was under construction at the beginning of this outbreak is going to be opened on time.”
He did say that many projects that were in the planning phase in 2020 were essentially deferred. “This is going to have some longer-terms implications,” he said. “For 2021, the supply growth still looks pretty good, it still looks robust. We were at the top of the cycle. We are at a place of pretty robust supply growth. We will see that in 2021, but 2022 on the other hand, that is when all of those hotels that were in the planning phase in 2020 and were deferred, that is when they would have opened, they won’t be opening, so we might see a little bit of an occupancy boost for existing hotels in 2022. That is also something that people should look out for, but not in 2021.”
Ford said there is the possibility of a downtick in Q4, but it isn’t a certainty. “But I think as a vaccine comes along and more people get vaccinated, and people get out and they start traveling more, I think some of these developers are going to decide it is going to be time to start putting the shovel in the ground,” he added. “Just because you start building a hotel, you are not going to open for many months after that, so in 2022, it will probably be a great time to open projects. Not to say that 2021 is not. You will see more openings in the second half of 2021, with people opening in anticipation of a stronger leisure and business demand.”
He continued, “At the end of the third quarter, there were still 5,280 projects in the pipeline, 655,000 rooms. That is pretty strong. It doesn’t matter what cycle you are in. That is a testament to the fact that there hasn’t really been a big falloff.”
Ford also predicts that more projects currently under development will end up flying a brand flag. “Consistently, on a quarter-by-quarter basis going back a number of years, there is always a high number of unbranded hotels in the pipeline,” he said. “In the third quarter of 2020, there were 583. That is pretty strong, but historically, probably 85%-90% of those hotels that are in the pipeline right now will ultimately select a brand. I expect that number to be even higher going forward. One of the things that developers and owners are seeing now is the importance of being affiliated with a brand. Brands are going to help you get through this, and it is so difficult to navigate out of this downturn by yourself as an independent.”
The pandemic also hit the industry hard in its role as a major employer in the U.S. According to data supplied to AHLA by Oxford Economics, more than 670,000 direct hotel industry operations jobs and nearly 4 million jobs in the broader hospitality industry were lost due to the pandemic. In 2021, employment in the industry is only expected to grow by 200,000 jobs compared to 2020, resulting in a net loss of 478,245 hotel employees from pre-pandemic levels, according to Oxford Economics.
More work to do
AHLA’s Rogers said that his association will continue its work to help the industry get through these difficult times, which in 2020 included lobbying Congress for much-needed COVID relief. “We never stop working with our friends in Congress to help find solutions,” he said. “What we have received so far has been very helpful, but frankly are just stop-gap measures. We really need to find something to make the Main Street Lending Program work. It did not work under Secretary Mnuchin, and we have already been in contact with [then]Secretary Nominee Yellin’s transition team. We think there is a lot of opportunity there to make Main Street Lending work because those low-interest loans are going to help a lot of hotels make it over the next few years.”
He added, “I continue to remind policymakers that while the rest of the economy is expected to bounce back strong at the end of 2021, the travel and tourism industry is not supposed to be back until the end of 2023, so we are going to need more help than your average business.”
While 2020 was a terrible year for the hotel industry, HotStats’ Eisen sees it as a lesson that will help hoteliers into 2021 and beyond. “The resiliency of the hotel industry is clear: By December, Asia occupancy was at 50%,” he said. “It’s well off year-to-year, but an amazing feat figuring that in March occupancy was below 20%. Other regions are hoping for a comeback, though it’s been uneven. The development of a vaccine is a first step toward a robust recovery—a panacea for the travel industry. Not until people and companies feel safe to travel will the hotel industry begin to get back to pre-COVID levels of operational performance.”
He continued, “If there is any silver lining, it’s this: The pandemic has forced hoteliers to rethink their assets, to run break-even analyses, return to zero-based budgeting and get more efficient with labor and other operating expenses. COVID-19 was the ‘black swan’ event the hotel industry always alluded to but hoped to avoid. And while it couldn’t sidestep it, it may be even stronger as a result.” HB
For more on what 2021 will hold for the hotel industry, be sure to check out our next webinar in the Hot Topics virtual series: “Industry Outlook 2021: Numbers & Analysis,” scheduled for Tuesday, Feb. 16 from 2:00-3:00 pm ET.