The updated Coldwell Banker Richard Ellis (CBRE) April 2020 hotel report takes more into account the impact of COVID-19.
And as expected, things may get worse before they get better. So much so, CBRE says the revenue per available room (RevPAR) for hotels will recover to 2019 levels by 2023.
This is not to say there won’t be a jump from the record lows the hotel industry is experiencing in the near future. As a matter of fact, the outlook for the hotel industry is somewhat optimistic.
CBRE April 2020 Hotel Report
In the April 2020 report, Jamie Lane, Sr. Research Director CBRE Hotels Research, Econometric Advisors, says, “We expect challenging times ahead for the U.S. lodging industry, but believe travel and the services associated with it will once again recover and quickly outpace historical peaks once this pandemic is eradicated.”
Lane says, “Our current expectations are that as early as Q3 2020, the activity will begin to stabilize, and a recovery is expected to be underway by Q4.”
The optimism is more than welcomed, especially by small hotel operators who by the way make up 61% of the hotel properties in the U.S.
Key Findings of the CBRE April 2020 Hotel Report
As we head to the second half of 2020, the devastating impact of COVID-19 will be felt by businesses and individuals across the board. And these are some of the key findings from the CBRE report:
- GDP growth will decline by 4% in 2020, before the outbreak the outlook it was 1.9% growth
- S. RevPAR will decline by 46%, with a contraction of almost 80% in Q2
- Occupancy will decline by 36%; average daily rate (ADR) is expected to decline by 16% in 2020
- Occupancy levels are expected to bottom out at 23.3% during the second quarter
- 37% decline in U.S. revenue per available room for the year
Furthermore, there are some complex constraints that will affect the industry. This includes social distancing and limitations on group gatherings, which is a global issue. Another pressing matter is uncertainty about the financial future. The last thing consumers will do with both of these constraints in place is to travel and stay in hotels.
Even though the industry is going to take a blow, above all, luxury, upper-upscale, urban, airport, and resort property segments will be especially hit hard. The report says these segments showed a 93% decline in RevPAR for the week of March 8-14. On the other hand, the decline for midscale and economy properties was 63%.
When it comes to markets, the most severe immediate impact will take place in locations that take a high percentage of their revenue from March and April. Locations in Phoenix, West Palm Beach, Tampa, New Orleans, Miami, Fort Lauderdale and Tucson are some examples.
The April 2020 CBRE hotel report is optimistic the industry will recover rather quickly. And this is based on data from past shocks and the impact they had on market hotel demand.
The report looks at the tech bubble, 9/11, SARS, and the Great Financial Crisis (GFC). In these four scenarios, the decline was steep and the recovery period was within 6 to 12 months. However, the drop with COVID-19 is high at 46%. The past event with the highest decline was SARS at a little over 30%.
Outside of these events, the Zika outbreak in Miami took 14 to 24 months to recover.
In the case of COVID-19, the RevPAR will recover to 2019 levels by 2023. But this won’t happen before losing nearly $100 billion in rooms revenue alone by 2022 based on pre-COVID-19 forecasts. The downside scenario in the report estimates 6 to 18 months for U.S. hotel demand to recover. And 12 to 24 months for ADR and RevPAR to recover.
The recovery process will require operators to make severe reductions to employees’ hours and compensation. But the report says operators will have to take additional measures. This includes many owners shutting down completely during this period. This is because any additional revenues from operating will not be enough to cover the variable costs of keeping the property open. Similar to how hotels in seasonal locations shut down during the off-season.This the report says may lessen the impact on profitability.
The Positive Outlook
On a positive note, the report highlights the fast recovery of Chinese hotels from the March 2003 SARS outbreak. In that case by July of that year SARS was contained and the hotels did well. The hope is the same scenario will play out for COVID-19, but this will depend on finding a vaccine early.
Another positive aspect of the recovery is U.S. hotels are in a much more profitable position than past recessions. The high-profit margins the industry experienced in 2019 in the U.S. should help.