The retail market faced challenges before COVID-19 hit. The office market was solid before the pandemic sent employees working from home in droves. But the hospitality market? It was thriving in many parts of the country before March of 2020.
But when COVID hit? This sector took an immediate nosedive. Business travel disappeared in March and April of last year. And leisure travel was all but nonexistent, too.
Consider these numbers from researcher STR: In March of 2020, the U.S. hotel occupancy rate fell 42.3 percent from the same month one year earlier, plummeting to 39.4 percent. The average daily rate fell 16.5 percent when compared to a year earlier, dipping to $110.66. And revenue per available room — better known as RevPAR, dropped 51.9 percent from March of 2019, falling to $43.54 during the same month last year.
Things got even worse for hotels one month later. STR said that the occupancy rate for U.S. hotels fell to 24.5 percent in April of 2020, a dip of 63.9 percent from the same month in 2019. The average daily rate fell to $73.23, while RevPAR dropped to $17.93.
But what about today? The industry, maybe thanks to the optimism generated by the country’s vaccine rollout, is slowly recovering. STR reported that as of the week ending April 3 of this year, the U.S. hotel occupancy rate was 57.9 percent. The average daily rate had climbed back to $112.76, while RevPAR stood at $65.33.
The future looks brighter, then, for the U.S. hospitality industry. That view was confirmed by two hospitality-sector specialists with the Chicago office of JLL, Jeff Bucaro, executive vice president for capital markets, and Adam McGaughy, senior managing director with the company’s hotels and hospitality group.
Midwest Real Estate News recently spoke to these two experts about the state of the U.S. hotel industry in key Midwest markets such as Chicago, Minneapolis, Indianapolis and St. Louis. Here is some of what they had to say.
How optimistic are you about the future of the hospitality sector?
Adam McGaughy: The optimism is there. We not only sell a lot of hotels, we also have access to a lot of data. Data is king right now, and it is what is causing some encouragement. The leisure travel market continues to get stronger. That has been the first part of the travel market to come back and it continues to increase quite a bit.
Personally, I just got back from Minneapolis. They are starting to see weekend occupancies in hotels in Minneapolis get back up to the 60 percent range. That’s a positive sign. We are also seeing a lot of wedding business. Every hotel I have been in physically has gotten double to triple the amount of wedding banquet business on the books. A lot of the weddings planned during COVID have been pushed out. As restrictions start to ease, people are starting to get married again.
That is surprisingly good news.
McGaughy: A lot of the press and information early on focused on the negativity of convention center cancellations. Chicago had a moratorium on all meetings larger than 10 people. Cities across the country were cancelling conventions. The good news is that in markets like Chicago and Minneapolis, we are seeing about 75 percent of those who canceled rebook. They are rebooking for six months to a year out. So that is challenging. But the business is back on the books. The greatest risk now is that those bookings might continue to get pushed out every three to six months. Hopefully, that doesn’t happen. As we navigate the third wave and people are getting vaccinated, the hope is that this doesn’t happen.
Right now, people are the most optimistic about leisure travel. Group business is number two and corporate travel is the third and most lagging generator of hotel business right now.
Do you think corporate travel will return once companies bring their workers back into the office?
Jeff Bucaro: It looks like most companies are looking at returning to the office at the latest in September. Even Google has said that after September 1 employees will have to seek written approval if they want to work from home more than 14 additional days in a year. Companies are seeing that collaboration has dropped dramatically. There is no way to instill that work culture and innovation when people are not in the same place. You can’t collaborate and come up with ideas. Companies are starting to see that they are suffering from everyone working from home. They need to get back to the office.
There will be an impact on the sales side. As companies hear that their competitors are back in the market and that their salespeople are visiting clients, they will want to have their own salespeople out, too. I think that many salespeople are ready to travel and get in front of people. That will all come back. That bodes well for the future of hotels.
I know that road trips have soared in popularity during the pandemic. What impact has that had on the hotel sector?
McGaughy: That is a phenomenon that we saw taking place as soon as last summer. The number-one market for hotels right now is the drive-to-leisure destinations. A lot of people are getting into their cars. They are now taking longer driving trips, heading to places like Florida and North Carolina. We are seeing the hotels in these drive-to-leisure destinations being positively impacted by this type of travel.
And now we are also starting to see people returning to air travel. During spring break, the air travel numbers did increase. Travel is increasing to destinations like California, Florida and New Orleans. We are seeing people getting on airplanes and coming out to these destinations.
Bucaro: Those drive-through markets, places on the way to other destinations, are also seeing stronger business. I was talking to a lender friend of mine. He took a family trip to Myrtle Beach. He had to drive straight through 15 hours because he couldn’t find a hotel room along the way. They were all sold out.
The traveling sports teams are getting back out, too. I have a daughter who plays volleyball. The weekend rates on a 20-year-old select-service hotel in Rockford, Illinois, were $200 a night. That’s pretty incredible. Business is starting to pick up.
Many states are starting to relax COVID restrictions or do away with them completely. What effect will this have on the hospitality sector?
McGaughy: I was out in St. Louis about two weeks ago. The state of Indiana had announced that it was relieving restrictions. You should have heard the gasp in the senior leadership in St. Louis. Indianapolis is a huge competitor for them when they are trying to attract high school sports to their hotels. With Indiana relieving all restrictions, that gives the hotel operators there a tremendous competitive advantage. The hotels in some states are already using the easing of restrictions as a competitive advantage.
Before the pandemic, we had written about how strong select-service hotels were performing. Do you think this type of hotel will remain popular among investors once travel picks up again?
Bucaro: A lot of investors have shifted to select-service. They have lower key counts and better margins. Food-and-beverage margins aren’t all that great. Food and beverage is almost a loss leader for hotels. I think we’ll only continue to see more popularity among the select-service side of the business.
As the pandemic wanes, will the hotel industry’s recovery be an uneven one, with certain hotel types and locations recovering quicker than others?
Bucaro: Definitely, it will be an uneven one. We have already seen a bounce-back in drive-through leisure hotels. I spoke to a client with beachfront hotels in Florida. Those hotels had their best March ever. The client expects 2021 to exceed the pre-2019 peak by about 20 percent. There is so much pent-up demand for travel right now. But business travel will come back more slowly. The hotels that rely on business travel will be slower to come back.
In markets that have a strong union presence, like Chicago, Boston, New York and San Francisco, there will be a longer time period for some of those hotels to recover. They will have labor negotiations to go through before they reopen.
McGaughy: The recovery will be very uneven. Most expect a full recovery for the hospitality industry toward the second half of 2023. That’s when these experts expect to get back to a restabilized pre-COVID level. It will depend on each market, though. Some markets will bounce back much quicker.
Was there anything about how the hotel market has responded to the pandemic that has surprised you?
McGaughy: This is the fourth time I’ve been through a major down cycle. This was unusual, though, in the severity of how far occupancy dropped so quickly. I think there was a belief early on that there’d be more distressed properties in the market. The equity market certainly developed and created some new funds to play in the distressed hotel space. The theory was that they’d be able to acquire good assets for 30 to 40 percent discounts. None of that came about.
The government relief packages helped owner/operators. The banks and CMBS servicers were smart in terms of how they did forbearance. They worked out their loans and extended them to a point. Forbearance has often been negotiated and figured out through the end of this year. There’s been a good relationship between owners and lenders working out what’s best for the asset.
Finally, how are the debt markets viewing hotels today?
Bucaro: The debt out there is still focusing on a subset of the assets. The destination drive-through assets are seeing a tremendous amount of liquidity. When you start to get away from that, the lender pool gets thinner. It’s easier today to get a $100 million deal done than a $20 million deal. The major global investment management firms are looking for bigger deals. The smaller the deal, the more shallow the lender pool or the more expensive the pricing becomes. There is a strong debt market for the larger assets. These assets were impacted by COVID, but they had some operating cash flow in 2020. There is a very clear path to recovery for them. The beach-type assets are strong, too. When you start getting away from that profile, there is less of a debt market. That doesn’t mean there’s not a lender for a deal, but it does mean that it’s tough to get more of a competitive bidding structure. You will pay for that deal in pricing.
Does the future look brighter, then, for hospitality?
McGaughy: I remember a week after 9/11. No one thought anyone would get in an airplane again. That eventually changed. This might take longer, though. Markets like Chicago and Minneapolis are still seeing occupancy rates hovering in the high single digits. It’s tough. But things are getting better. There is a light at the end of the tunnel. The vaccine rollout and the easing of restrictions are helping. The owner/operators who have stuck it out this long are in this for the long-term. We’re all hoping to get back on the rood soon.