Here’s a look at what the road to recovery post-COVID-19 might look like in the U.S. based on past recessions.
The novel coronavirus (COVID-19) is currently ravaging throughout the U.S., with one in four cases in the world diagnosed here. However, as hotel performance metrics in China clearly show, the impact of COVID-19 is finite.
It may not feel that way right now or in the coming weeks, but we can clearly see that Chinese hotel occupancies are slowly recovering. We take comfort in this fact and know that the industry will survive. Despite being battered and bruised, and with much to mourn and much loss to digest, the hotel industry will go on as consumers hit the road again. This will first occur slowly, then in ever-increasing numbers.
How could an eventual recovery play out in the U.S.? Let’s consider the three demand types of leisure, corporate transient and corporate group, as well as some other “known unknown” factors that could influence what the eventual recovery looks like.
The main force that will shape the behavior of all three demand sources is a sense of safety.
Safety can be achieved in two ways. One, travelers who lived through the virus are now immune (and as of today’s knowledge, thought to be noninfectious) and therefore feel safe. Two, hotels and brands provide “tangible service clues” to assure travelers that something they cannot see actually did take place, such sanitizing facilities and rooms (in a post-COVID19 sense).
What we are experiencing, first gradually and then rapidly, is the emergence of a two-class society: those who test positive for the virus anti-bodies—meaning they had the virus and lived—and those who do not have the antibodies and might be still be susceptible to the virus. The first group can travel without restrictions, and they will. The other part of society may continue to quarantine or severely curtail their travels.
Brands and hotels will need to convince the travelers that have not yet been infected that their hotels are safe spaces. Operators and their PR teams will spend a lot of time and energy to promote their cleaning regimens and come up with new and novel ways to communicate to guests that the surfaces, door handles, phone receivers and toilet seats are clean and free from the virus. Those “tangible service clues” still need to be invented but are crucial to giving a sense of safety and to getting people back on the road.
Once a feeling of safety is established, how will the three demand drivers shape the recovery?
Leisure: These will be the Roaring ’20s
After being stuck at home for eight (or 12? or 16?) weeks, the American consumer will take to the roads and skies with a vengeance. Today we cannot hug or shake hands, but the pendulum will swing the other direction, and what a party it will be. I expect beach destinations and any other destination with a large outdoor component to reap the benefits of the unquarantined masses. But will travelers embrace communal tables and all those newly designed open, social spaces just like it’s 2019? Time will tell.
As we saw in other recessions, leisure demand always bounces back first, driven by the inalienable right of the American consumer for life, liberty and the pursuit of travel. Add to that the steep discounts from operators trying to regain market share as demand slowly grows, as well as cheap gas, and you have the perfect storm for drive-to markets and cheap airfare destinations (that is, destinations serviced by air carriers that make it through the next few months intact).
The counter-argument is two-pronged.
Unemployment will soar, and many consumers, even if they wish to, will not have the financial wherewithal to travel. This will certainly impact the absolute demand numbers. Secondly, because the federal response to the virus outbreak was so halting and therefore the numbers of infected and deceased people are so high, international tourists coming to the U.S. will be sharply lower than expected.
However, it is not unreasonable to assume that because the U.S. will likely be the country with the most cases, a few foreign governments will stop travel for untested Americans and force them to stay home. In that case, the decline in international travelers will be slightly offset by the increase of domestic travelers who wanted to go abroad and cannot.
The U.S. is still in a relatively more robust position because of the scope of domestic travel than many other countries that are solely reliant on foreign tourists. Imagine being Singapore or the Maldives in this scenario.
Corporate transient: Only one question matters. What’s the risk?
Allowing their corporate business travelers back on the road will be a decision no CEO will take lightly. No one in the C-suite wants to receive the call from a spouse that a staff member got sick because the business needs mandated travel.
Just as on the leisure side, there will be travelers with the antibodies who choose to travel, and they will be the first guests to reopen hotels or flight routes. The duty of care that a travel management department and senior staff have for their employees will likely color the decision-making process for a while, even after new cases drop to single digits per day.
As Americans get effective at working from home, many might wonder why they should hit the road anyway. Yes, there are always certain relationships or meetings that need the personal touch, but in general the COVID-19 pandemic showed that technology these days can facilitate business as usual without leaving home (and PJs, as it were).
In-house counsel will push for resuming travel later, and the head of sales will push for resuming travel earlier, and the reality will be different for each company. But travel will resume. The number of business travelers, however, will likely be lower than before for a while.
Corporate group: If you host it, will they come?
Corporate and association group meetings are a binary affair: either they happen or they don’t. Once corporate travel rebounds in the fourth quarter, the question is how group attendance will fare. As with individual travelers, the risk assessment is key.
Travelers who cannot get sick and cannot make others sick are good to go; others may stay away from crowds until a vaccine is readily available. Corporate sponsors of events will have to judge if the attendance of their team members is worth it if overall attendance is down. If they decide to pull sponsorship for this year’s event, the meeting planner may decide to call off the whole event, even though 30% or 40% of attendees would have come. But that is not how large meetings work; it’s either all or nothing.
However, one positive scenario might be: Meetings in Q4 take place as planned. Postponed meetings from Q2 are being pushed into Q4. This could lead to compression nights, as a city has now many more attendees than before, which in turn could lead to higher rates for the corporate transient traveler. This is a best-case scenario, I would not bet on it, but it could happen in certain nights in certain markets, providing some demand and average daily rate upside.
Wildcards: The known unknowns
Two other possible influences on the recovery are worth pondering: new supply and a resurgent pandemic
With unemployment figures at new highs, millions of Americans will need to find a way to supplement their income. In this gig economy, we are all Uber drivers and Airbnb hoteliers. In other words, the advent of home sharing and short-term rental by owner business models will allow those without a job to supplement their income by renting out separate spaces or bedrooms in their home. New supply for those accommodations could surge, eroding pricing power for those accommodation types, and in turn have a negative impact on hotel room rates in general.
The counter to this narrative is driven, again, by risk. In an environment in which people are not sure if a trip could make them sick, it is a bit easier to trust a global hotel chain and their cleaning protocols than any one short-term owner, who may be a slob or may be perfectly aligned with CDC guidance. Many are not willing to bet their lives to find out which it is. Hotel brands have an easier way to communicate this than home-sharing brands that are built around individual homeowner actions.
One other comment on supply: I am not a believer in a tsunami of foreclosed properties washing over the debt and equity funds in 2021. Rather, it makes more sense to look back at the Great Financial Crisis and the actions of a lot of the financial institutions that were holding debt that was technically in default. The term “extent and pretend” was coined then and may still be useful today. Let’s face it, no regional bank president wants to become a hotelier.
If the data from China is any indication, the amount of zero-revenue weeks is finite, and demand will return. Rather than foreclose on non-performing loans, bank officers might hold their noses and let the owner eventually just catch up on payments. That, of course, will not work for everyone. Some hotels will change hands, but of those, likely all will stay open. The only thing worse than taking over a hotel is taking over a closed hotel.
Secondarily, the pandemic that has hit Asia, Europe and now the Americas hard so far seems to have not resulted in serious case counts in Africa. In some of the developing countries, especially in sub-Saharan Africa, the medical system is stressed on a good day, and a pandemic could cause even more severe disruptions. The fear is that the virus, even if case counts plunge on other continents, could resurge here in the winter and again next spring. Cases could rebound once more around the world. Travel restrictions would stay in place, bringing international travel to a much longer halt than currently expected.
In sum: This too shall pass
STR’s current U.S. revenue per available room forecast for 2020 stands at -50%, with a sharp rebound of +63% expected in 2021. These numbers are in flux, but the tenor of the prognostications is clear: this is temporary disruption. Severe, yes. Deadly, yes. But nonetheless temporary. With that in mind, it is not too hard to imagine recovery scenarios that will point at prolonged, slowed growth for the U.S. hotel industry.
Not today. Not tomorrow. But eventually.
Special thanks to Hannah Messerli, PhD, The World Bank Group; and Bjorn Hanson, PhD, former partner, PWC, for their thought partnership.
Jan Freitag is SVP of lodging insights at STR. STR is the parent company of Hotel News Now.
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