The COVID-19 pandemic is presenting the global hotel industry with perhaps its severest challenge ever. While the depth of this recession is extraordinary, the industry has overcome many downturns. Of the 11 recessions since 1938, the last two in 2001 and 2008 were by far the worst, taking revenue per available room (RevPAR) between four and five years to recover to pre-recession levels. The travel industry is one of the most important global economic drivers and time after has time found ways to bounce back from downturns. After 9/11 and the Global Financial Crisis (GFC), it took just two and half years on average for demand to recover in the U.S. and occupancy never dropped below 85% of pre-recession levels.
FIGURE 17: INTERNATIONAL TOURIST ARRIVALS BY WORLD REGION, 1950-2018
Source: United Nations World Tourism Organization, 2019.
TRACKING THE RECOVERY
As social distancing requirements are lifted, pent-up demand for leisure travel will support the first wave of recovery. Many U.S. Southeast coastal markets have achieved occupancy levels of more than 70% on weekends between late May and early June. Leisure travel is expected to account for the bulk of hotel demand in Europe and the Americas this summer, and occupancies will remain very low compared with pre-recession expectations. The industry will not fully recover until corporate travel, group meetings and conventions and international travel resume in earnest, which may not happen until there is a vaccine or widely available treatment for COVID-19.
FIGURE 18: FORECAST TRAJECTORY OF HOTEL OCCUPANCY RECOVERY
Source: CBRE, Q1 2020.
HOTEL FINANCES HARD HIT
Analysis of key operational indicators for European capital cities, based on HotStats data for open hotels in April and May, showed that an 83% average annual decline in hotel turnover caused a 131% decline in gross operating profit (GOP). Despite hoteliers reducing operating expenses, fixed costs have weighed heavily on the bottom line. In the U.S., the average monthly cash burn rate of a closed hotel is estimated at US$488 per room when accounting for a minimal amount of fixed costs, excluding rent and debt servicing. And while APAC is leading the global recovery in terms of hotel demand, a surge in COVID-19 cases in Singapore and Hong Kong SAR in April resulted in a reintroduction of containment measures, which caused monthly average hotel GOP per available room to plunge to negative US$13.90 for the region (HotStats, 2020).
FIGURE 19: EUROPEAN KEY CITIES, HOTEL TOTAL REVENUE & GROSS OPERATING PROFIT, MARCH & APRIL 2020 YOY CHANGE
Source: HotStats, CBRE Research, 2020 – based on open hotels.
STATE SUPPORT HAS SHIELDED THE HOTEL SECTOR
State-backed support such as loans, grants and tax breaks has so far shielded many hoteliers from the full force of COVID-19. Furlough programs, for example, have enabled operators to reduce their staff costs, which generally account for the lion’s share of a hotel’s operational expenses. Recognizing that in many markets hospitality could be one of the last business sectors to recover, some government programs are being extended; however, these measures likely will end before hotel revenues have fully recovered, thus presenting further financial liquidity challenges.
BID-ASK SPREAD TO NARROW
A lack of available working capital likely will be most acute among the non-diversified and/or smaller owners and operators, with low cash reserves and/or limited access to credit lines. The cost of reopening, including new measures to ensure the safety of staff and guests, will cause some owners to consider repurposing their assets and some amount of secondary hotel assets to remain permanently closed. Investors remain keenly interested in prime assets, albeit for large price reductions and with certain conditions. Unsurprisingly, owners are reluctant to sell at a significant discount. Depending on the trajectory of recovery and any further pressure on working capital, the bid-ask delta likely will narrow on future opportunities and result in the closing of deals.