The latest U.S. hotel industry forecast predicts hoteliers will hold steady on rates despite the effects the coronavirus pandemic will have on hotel demand for this year and 2021.
REPORT FROM THE U.S.—The latest U.S. hotel industry forecast projects hotel performance won’t return to pre-pandemic levels for years as a result of decreased demand.
During the session “The U.S. forecast: Pulling back the curtain” for the online Hotel Data Conference, STR President Amanda Hite and Host Hotels & Resorts EVP of Corporate Strategy and Analytics Sourav Ghosh dove into the forecast and what it means for the hotel industry. STR is the parent company of HNN.
The new forecast isn’t that different from the one issued in June, but it is slightly worse, particularly for demand, Hite said. Previously, STR and Tourism Economics anticipated a demand recovery in the third and fourth quarters of 2020, presuming COVID-19 would be under control, the country could start slowly reopening and more small meetings and corporate travel would return.
“That’s not what we’re anticipating now,” she said.
Demand expectations are centered on the leisure market, particularly drive-to and fly-to markets, which have been in recovery since Memorial Day, Hite said.
“We had all hoped for some more corporate travel demand and maybe some small group meetings, but those are really off the table as you look at case numbers across the country,” Hite said. “There are so many hotspots still out there.”
The travel restrictions still in place will hamper demand recovery for the rest of the year, she said.
Rate and RevPAR
Past experiences could suggest that because hotel demand is down, average daily rate should be down as well, Hite said. The pace of ADR growth had been anemic for four or five years prior to the pandemic, so there was a fear rates could drop dramatically because of the falling demand, she said.
What’s different about this situation is that hoteliers realize lower rates are not going to induce more travelers because of travel restrictions and coronavirus case numbers, she said. Revenue managers are pricing hotels to the current business mix.
Revenue managers understand that most hotels can achieve occupancies of only 50% or below right now, and lowering rates isn’t likely to change that, she said.
“There's a real discipline there that we’ve seen that makes us more confident about this rate forecast,” she said.
There’s been debate over what will happen when travel restrictions are lifted, Hite said, acknowledging hoteliers may try slashing rates to steal share and induce more demand.
Ghosh said from an ownership perspective, revenue matters most, regardless of occupancy and rate.
“You can look at occupancy, rate, demand, but ultimately, it’s what revenue are you really getting and what's flowing through to the bottom line,” he said.
RevPAR is a great indicator of performance, but no one can take RevPAR to the bank, he said. Owners are focused on profitability and minimizing expenses, he said.
“Unfortunately, that’s where a lot of companies are, is essentially trying to minimize their cash burn,” he said.
The forecast predicts hotel supply will be down 3.7% at the end of 2020, Hite said. That includes all temporary closures. A larger decrease in supply was forecast in March, but hotels that closed didn’t stay closed as long as expected, she said.
Total room inventory supply, which doesn’t take into account temporary closures. shows the industry ended 2019 with a 2% increase and should end 2020 with a 1.4% increase.
The hotel projects that are under construction but had to pause because of lockdowns have mostly restarted, but openings have been pushed back to 2021 or 2022, Hite said. Some projects in the planning and final planning stages have moved to deferred or abandoned status, but those won’t affect supply numbers for the next two years, she said.
The pipeline correction is further down the line, Ghosh said. The biggest question in the near term is the number of permanent hotel closures. Host has been tracking these closely and found that so far, roughly nine upper-upscale and luxury hotels have closed permanently in the top 25 markets.
“We do think with the unprecedent level of distress, this will likely escalate over the next several months,” he said.
April lodging delinquency rates stood at about 2.5%, but that figure spiked to 25% in June, he said. It will be interesting to see whether those hotels change hands and, if so, whether the new owners think the properties’ highest and best use is still as hotels, he said.
Beyond next year, supply will show a favorable tailwind at least through the end of the cycle, Ghosh said. During the last recession, rooms under construction fell in major markets by 68% in just two years following the peak of 2008.
“We could expect an even bigger pullback in the pipeline this time around, so you could argue it would lead to sort of low levels of supply growth in 2022 and beyond,” he said.
Back to 2019 levels
It’s not the narrative most will want to hear, but the forecast doesn’t show demand returning to 2019 levels until the second half of 2023, Hite said. That’s good in the sense that there is a timeframe for the recovery.
“It will be 2024 or later before (ADR and RevPAR) get back to those 2019 levels, which is why profitability will be such an important metric to pay attention to over the next several years,” Hite said.