No one can accurately predict how things will change when the pandemic of 2020 subsides, though we all know things will change. What follows are some observations based on how other demand shocks played out and some predictions of how things might change moving forward.
Call me a fool. Making predictions about how something as sudden and unexpected as a demand shock will change the world and the hotel industry is a fool’s errand. Yet, that is what I intend to do.
What follows are some observations and expectations about what previous downturns tell us about this situation and how things might unfold in the future. With so much still unknown about the path of the current pandemic, the only thing that is certain about these predictions is that some, if not all, will be wrong. I just hope they keep people focused on life after the pandemic, as focusing only on the present is way too depressing.
Before the black swan landed
Like the last two downturns fueled by demand shocks, this one started before the black swan landed. In 2001, occupancy turned negative (on a trailing 12-month basis) in May, more than three months before the terrorist attacks of September 11. In January of 2007, occupancy flattened out (also on a trailing 12-month basis), more than six months before Lehman Brothers collapsed. And, as I discussed in my January 2020 column, smoothed occupancy declined slightly for two consecutive months in December of 2019.
A mix of excess supply and softening demand
You can argue about whether excess supply growth or softening demand growth brings on the downturn, but the reality is it is always both. Occupancy is simply the intersection of supply and demand. Since the beginning of time, meaning since Randy Smith and Mark Lomanno began keeping records (around the time STR was founded. STR is the parent company of Hotel News Now.), each period of sustained negative occupancy has occurred when supply growth was high and demand growth began to slow. Looking at the data, you can see this in 1991, just as the first Gulf War was beginning, in 1998-1999, before the terrorist attacks in 2001, at the end of 2016 and December 2019.
When hotel stocks peaked
Hotel stocks have peaked around the time that investors could see consistently flat or declining occupancy. In 2011, my team looked at what fundamental signals corresponded to peaks in hotel stock prices and found that occupancy growth flattening coincided with each peak in stock prices as measured by the Baird/STR Hotel Stock Index. The index most recently peaked on 27 December 2019, shortly after STR released November results which showed the fourth negative month of occupancy (again, on a smoothed basis) during 2019 and, importantly, the second month in a row of such a decline.
Calling the bottom is more difficult
I never want to give anyone investment advice so please don’t take this as such—every investor’s time horizon, liquidity and risk tolerance is different. While I believe we have seen the bottom in hotel stocks (on 18 March 2020), we could retest that low in the months ahead. But I do believe investors are looking for signs that the worst case will not play out and that occupancy has bottomed. That seems consistent with our work in 2011. Investors seem to be trusting that the federal stimulus will limit the bankruptcy risk for hotel brands and real estate investment trusts—that is hardly a sure thing, but there is reason for optimism. Spotting the trough in occupancy will be much harder, given the number of hotel closings which STR will remove from the denominator in the occupancy calculations (rooms sold, or demand, divided by rooms available, or supply).
Discounting doesn’t do a lot to boost revenue when there is little demand around. While I am not telling anyone how to run their hotels or how to set rates, it is worth looking at what worked and didn’t work in previous downturns. HNN published an STR analysis that showed how various pricing strategies worked in the 2008-2009 downturn. It should be required reading for anyone involved in setting a hotel rate strategy.
Profitability recovery depends on a few factors
How long it takes for businesses to return to profitability will depend on just how much liquidity is injected into balance sheets of large and small businesses and how much money flows to consumers. The stimulus bill provides for cash payments to individuals and families and significantly increased unemployment compensation as well as credit for businesses (under some circumstances). In addition, the Federal Reserve is undertaking unprecedented liquidity injections to ensure that banks and other lenders, including debt investors, can continue to fund businesses and consumers. But we are a long way from clarity about how quickly consumer and business spending will bounce back.
Group business likely to rebound
When social distancing ends, people will want to get together in person, which means a sustained recovery in group business is likely. We all miss our colleagues and business associates, and we are all learning just how valuable in-person contacts are. This should spur a return to group meetings and some bounce in business transient demand, once corporate profits bounce back.
Technology has proven that some meetings can take place virtually
I had never heard of Zoom until I joined my first STR COVID-19 webinar. Granted, no one has ever accused me of being up on the latest technology, but we are all learning that we can exchange ideas online, even if that is a little more awkward at times than speaking face to face.
Some people will want to continue to work from home, though that can create new hotel demand
As someone who has worked from home since 2006, I can attest that it can work quite well. However, I still craved face-to-face interaction with my clients and with the hotel industry, and I traveled quite a bit to get it. Virtual meetings are great, but I, for one, value in-person gatherings, including the time outside of formal meetings, when people can talk casually and exchange ideas.
Supply growth is likely to slow for the next several years
Hotels under construction are likely to see delayed openings and financing for new projects is likely to become more difficult to find. This should somewhat speed the industry recovery.
Our global economy is likely to become a little more local
I would hope that we come out of this crisis with the realization that global supply chains that rely on one source of supply for any item are just too big a risk. Whether we are talking about medical equipment and supplies, drugs, food or even toilet paper, we need diverse sources to ensure timely and uninterrupted supplies of critical items. Local sources of even the most basic items, such as food, have become too scarce (so support your local farmer and farmers market!). Globalization has all kinds of benefits but we have seen the risks manifest.
Kindness is free and there can never be too much of it
We have seen, and continue to see, selfless acts by healthcare professionals, first responders, grocery store and restaurant employees, daycare providers and many others. People who are stuck at home and just want to help are sewing masks and helping their neighbors with basic needs such as food and transportation to critical medical appointments. People are reaching out to each other (by phone, email or more tech-intensive means). Let’s hope a good portion of that surge of kindness stays with us after this is all over.
Here’s hoping we all hang in there, experience as little loss of life and livelihood as is possible, stay healthy and keep a positive attitude over the months ahead.
After a 30-year career as a stock research analyst, David Loeb created Dirigo Consulting LLC, which advises on capital markets, strategy and communications issues. Clients have included REITs, brands, and private equity investors. He a member of the board of directors of CorePoint Lodging Inc., a publicly traded hotel REIT. He can be reached at email@example.com.
The opinions expressed in this column do not necessarily reflect the opinions of Hotel News Now or its parent company, STR and its affiliated companies. Bloggers published on this site are given the freedom to express views that may be controversial, but our goal is to provoke thought and constructive discussion within our reader community. Please feel free to comment or contact an editor with any questions or concern.