Speaking during the ALIS 6x8 webinar, CEOs agreed the hotel industry is in the earliest stages of a recovery, but there are several factors that could affect how long the climb back to normalcy will ultimately take.
REPORT FROM THE U.S.—By the strictest definition, the U.S. hotel industry has already begun its recovery from the historic drop-off in demand related to the COVID-19 pandemic, according to a panel of top executives. But it could be years before performance returns to levels seen in 2019.
Speaking during the “ALIS 6x8: Recovery Top of Mind” webinar, Marriott International President and CEO Arne Sorenson said there has been some “good progression” for demand in China, the market first hit by the virus, while on the other extreme, Europe is still suffering from an almost complete shutdown.
The U.S. lies somewhere in the middle, with some faint optimistic signs popping up. Occupancy has been “building week over week,” he said, driven by demand in drive-to leisure markets as individuals have been “dying to get back out.”
“That recovery is going to continue as long as states ease restrictions and the virus doesn’t reverse and come back in bigger numbers,” Sorenson said. “Those are both things we’ll watch carefully.”
Dave Johnson, CEO of Aimbridge Hospitality, said the markets seeing the earliest rebound are those that allow “frustrated” leisure travelers to get back on the road while maintaining distance and safety.
“People are excited that they can social distance on beaches, or they’re going to Colorado where they can hike outdoors,” he said.
But even the worst-hit markets have signs of life, he said, noting the company’s seven open New York hotels have seen four consecutive weeks of occupancy growth.
Chip Rogers, president and CEO of the American Hotel & Lodging Association, noted the hotel industry was hit the first and the hardest among the various sectors in the U.S. economy, and while the task of mounting a comeback may seem insurmountable, it will be done.
“We’ve just started the fourth quarter,” he said, comparing it to the New England Patriots’ comeback victory over the Atlanta Falcons in Super Bowl LI. “We might have started (the quarter) down 28 to 9, but I know we’re going to win whether it takes overtime or not.”
Mit Shah, CEO of Noble Investment Group, also used a sports analogy to express the daunting task ahead.
“Remember all the baseball analogies we were all so sick of, asking what inning we’re in?” he said. “We really don’t know now. We just know it’s going to be long. And I believe we have the combined benefit of an industry more together than it ever has been to fight on. We will have a therapeutic, and we will have a vaccine. People will travel again; it will just take time to get there.”
Mark Elliott, president of Hodges Ward Elliott, made his assessment in a literal sense, noting the recovery has to have started because “occupancy is higher than a month ago and there are more hotels open,” but noted there are competing forces at play. Those are continued fear about the disease and an overwhelming desire among individuals to get back into the world.
“This may be a slog until there’s a vaccine or herd immunity, but one thing is the country has decided is we’re not spending our lives in our homes any longer,” he said.
Mark Woodworth, formerly of CBRE and now leading R.M. Woodworth & Associates, said there are various factors that affect where a region or property stands in its recovery but overall demand and pricing are improving.
“That signals we’ve bounced off the bottom,” he said. “Then the question becomes how long is the path to recovery. The most likely scenario does point to 2023 as being the point in time when we get (revenue per available room) levels back to where we were in 2019.”
Here’s a look at some of the executives’ other predictions and observations:
Sorenson: Owners, new cleanliness guidelines
While real estate owners are largely viewed as large institutional entities, Sorenson said there are huge numbers of small-scale owners, usually with just one or two properties, who work with his company and others who have basically seen their livelihood go away for the time being.
“That’s a tough place to be,” he said. “Every day I start by thinking about that collection of people and the profound impact this has had to them.”
While much of the comeback will be shaped by macro issues related to the coronavirus—whether it surges again and how quickly a vaccine is developed chief among them—the hotel industry’s reaction also will be meaningful, Sorenson said.
Marriott is adapting operational changes to make travelers safer and more comfortable in this new reality, like more contactless check-in processes and “hyper cleanliness” around hotels.
In terms of the overall approach to housekeeping, Sorenson said he expects it to be “more intense between guests and less during the stay.”
“Both guests and associates want less risk of personal interaction during the stay,” he said, explaining why housekeeping will be more hands-off in that circumstance.
While everyone agrees leisure business is the fastest to return, Sorenson doesn’t want to write off group business, noting some forms of small group business already are looking to return.
“People need to get together,” he said. “There may be a silver lining, to some extent. As offices remain closed, businesses need places to pull folks together. Some of that may happen in hotels.”
In terms of larger groups, those with 1,000 or more attendees, he said those will need “new rules” that ensure social distancing, but ultimately they will come back after a vaccine is widely available.
Johnson: Scale as a cushion to recession
Johnson noted his company is poised to survive the downturn in large part because of its industry-leading scale, but there are many management companies that aren’t going to make it through.
“I’ve spoken to some of the public REIT CEOs we work with who have dozens of management companies in their portfolios and they don’t think half will make it through,” he said. “Ten years ago, that would’ve been me. We wouldn’t have made it if we didn’t have scale. I feel for those guys. We’re both a big and small industry, a very friendly competitive industry.”
He said a recovery will depend on cooperation across the travel sector, as airlines and even cruises will need to make travelers more comfortable to bring back demand. He said some of the changes needed have already been made in other industries.
“Cruise lines have been using unbelievable technology to make sure they’re spotless, clean and free of germs,” he said, noting hoteliers need to make efforts to communicate their cleanliness initiatives to guests.
Asked how the pandemic colored his view of Aimbridge’s 2019 acquisition of Interstate Hotels & Resorts, Johnson joked he wished he could’ve spent less money on the deal but ultimately it poises the combined company for stronger growth.
“There’s always, in downturns, a flight to scale and quality, and we have strong partners at Advent International, our largest shareholder, so we haven’t had to decimate our corporate team,” he said.
Rogers: Putting pressure on government officials
Rogers noted there have been significant wins for the hotel industry’s lobbying efforts, and he expects more to come in terms of changes to things like the Paycheck Protection Program to benefit the industry. But the voices in Washington have grown ever more crowded as the economic disaster grew deeper and deeper.
“When this started in late February and early March … we were one of four loud voices being hit in the U.S.—it was us, cruise lines, airlines and the restaurant industry,” he said. “We met with the President and Vice President and we had their attention and they understood it. As this has progressed along, every industry has been hit, and all their lobbying firms and associations have been working with Congress and talking about their issues.”
He said that cacophony of voices is why it’s increasingly important the industry is unified and vocal about the outsized impact hotels have seen from the downturn.
“When I talk to Congress, I make sure to tell them we were the first hit and the last to recover,” he said.
Woodworth: Length of recovery
While noting it’s still a way off, Woodworth noted this downturn actually represents significant opportunity for hotel investors.
“It will be a longer recovery, but the upside for market participants is probably better than anything we’ve ever seen,” he said. “It will just take a while to get there.”
He noted operational changes to accommodate for social distancing will be impactful for the time being for large group hotels.
“If they can only use half that space in many cases, the productivity of that asset is diminished,” he said. “But it will revert back.”
Elliott: Expectations for the transactions market
Elliott said he has seen shifts in the transactions market from week to week during the crisis. He believes potential buyers looking for deep discounting might ultimately be disappointed.
He said six weeks ago, buyers were looking at properties discounted 30% to 40% compared to what they would have sold for in early February, with sellers unwilling to make that move. Soon after, those discount hunters dropped their range to a 25% to 30% drop, with sellers “still not a taker.” More recently, Elliott has seen buyers more comfortable with a 15% to 25% discount, which he believes is more reasonable on the lower end.
“I think those 25% discounts are fleeting and short-lived,” he said. “It all depends on your view of the recovery.”
He said a 15% discount of asset pricing seems fair if you assume the industry returns to 2019 performance levels in 2023, and the market rejecting larger discounts in sales supports that opinion.
“If I buy a hotel today unlevered with no debt at a 25% discount, and I assumed its recovered by 2023 then sell for the same cap rate at the end of the fifth year, that’s a 15% return, which is much too high,” he said.
Investors holding out for better deals may be left out when it’s all said and done.
“The market is waiting for massive, massive discounts that may never come,” he said. “So you have to act on what’s in front of us, not what we might potentially hope for.”
He noted doing valuations is difficult at the moment, but investors can be “wrong significantly” in their assumption for the first two years of performance as long as they get “years three to five and their exit right.”
One of the biggest differences between this downturn and the Great Recession of a decade ago is the availability of capital, Elliott said.
Shah: Adjusting operations
Shah said the industry has an opportunity to push major and important changes to operations amid this crisis and it absolutely must seize it. He said changes to things like housekeeping and food and beverage will ensure long-term hotel success.
“We can’t miss this opportunity to change the paradigm of our operating model,” he said. “It’s about doing the right thing for future profitability.”
He reiterated that the hotel industry needs to do everything it can to “certify for guests that rooms are clean when they check in” and ultimately how the alternative lodging space deals with the issue of cleanliness will be interesting.
“It isn’t all of a sudden hotels are clean,” he said. “We’ve always been the safest form of accommodations in the entire lodging universe. When you think about the chemicals we’re using today in order to clean rooms, it’s the same exact things we were using in 2003 to protect guests from SARS.”
He noted many hotel investors are facing an unprecedented cash crunch, and while many lenders with the latitude to do so have been flexible, CMBS borrowers face some difficult decisions because falling behind on those loans put them in the crosshairs of “protocols that can be very, very punitive.”