Past Downturns Offer Perspective to Hospitality Sector
- Apr 08, 2020
As the coronavirus outbreak continues to take a toll on the economy, especially on the hospitality sector, a tentative 2020 outlook needs to take into account not only the federal stimulus package but also the uncertainty caused by this crisis. With actions aimed at preventing the spread of the virus—including travel restrictions or cancellations and social distancing measures—significantly impacting tourism, the first effects are already evident. Hotels have seen unprecedented revenue and occupancy losses in March, with some of them even becoming temporary hospitals.
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Despite the short-term decline, long-term fundamentals remain strong, as the sector has experienced outstanding growth over the past decade, according to CBRE Hotels Research. The hotel industry has experienced nine years of profit growth since 2010, as both occupancy and revenue have significantly risen. These factors are likely to contribute to the industry’s recovery, as they did following the Sept. 11 attacks and the 2008 financial crisis.
To offer a broader historical context to the current crisis, CBRE—which previously projected a 1.1 percent uptick in RevPAR for 2020—examined how the hotel industry performed during previous downturns. On average, RevPAR declined by 0.9 percent over the 11 historical recessions, resulting in a 2.3 percent downtick in total operating revenue. However, as the industry expanded at a faster pace over the past two decades, the greatest drops in revenue and profit occurred during the previous two downturns—multiple hotels saw their RevPAR decline by more than 30 percent.
In 2011, the gross operating profit for U.S. hotels dropped, on average, by 15.0 percent, the highest level until that point and one that even surpassed losses experienced during 1938, according to CBRE. The dip in profits was mostly caused by a decline in occupancy, unlike during 2009 when the impact was far greater, as both occupancy and average daily rates plunged. What’s more, as the use of intermediaries in the booking process accelerated between 2001 and 2009, the cost of revenue acquisition increased, resulting in an average loss in gross operating profit of 28.6 percent.
The road to recovery
Occupancy rates in major hospitality markets have declined considerably, as states or cities have enacted stay-at-home orders. For example, in Los Angeles, restrictions on international travel, delays in film production and premieres, as well as a statewide shelter-in-place order have greatly impacted hotel occupancy and revenue. But demand is likely to increase once the entertainment business resumes activity and travel restrictions are lifted. The same goes for Orlando, where travel restrictions, event cancellations and the closure of major entertainment venues—including the Walt Disney World Resort—have dampened demand. However, while the usual surge in demand during the spring and summer months is unlikely to happen this year, the entertainment industry could help speed up recovery in Orlando as well.
In New York, hotel fundamentals face increased challenges, as the state had the highest number of confirmed coronavirus cases in the country as of April 8. As a result, in addition to a ban on international travel, all nonessential travel has been restricted and bars and retail venues have been shuttered. But the metro’s hospitality market is slated for a rather quick recovery as the coronavirus threat stabilizes. Meanwhile, if the crisis lingers past Fourth of July celebrations, Philadelphia is likely to take longer to recover from the drop in demand. As large events have been banned, universities closed and business travel restricted, the challenges for the hospitality sector are great in the short term.
Consequently, recovery will inevitably depend on the duration of the pandemic and its effects on the overall economy. Almost 10 million Americans claimed unemployment benefits over the two weeks ending on March 28, the highest level of seasonally adjusted initial claims in history. What’s more, Oxford Economics forecasts that as many as 20 million workers could lose their jobs in the coming weeks. The unemployment rate could reach 12 percent, a sharp increase compared to 3.5 percent in February. However, the signs of recovery will only be evident as activity returns—as much as possible—to pre-pandemic levels.