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Bottomed-Out Hospitality Industry Begins Hopeful Strategizing

After a promising start to 2020, the hotel market hit bottom fast, but operators are now picking themselves up and looking toward 2021.

“Right now, the whole industry is in survival mode, so I feel like one of those crazy reporters on the Weather Channel, because we’re right in the eye of the storm called COVID,” Scarlett Hotel Group co-founder Rob Sadoff said Thursday during Bisnow’s Chicago Deep Dish: Lodging and Hospitality webinar.

The Commons Club, Virgin Hotels Chicago

“The good news is we found the bottom of the upper- to mid-scale market in the second and third week of April, and there’s been a small blip up since then,” he said. 

Scarlett shut down its Chicago hotel, where revenue was down 96%, but kept its Omaha, Nebraska, hotel open, along with several others in Florida. The federal loan program for small businesses helped the firm get past the roughest patch.

“All four of the properties we own got it, and obviously that’s been a nice stopgap for the net operating losses that we’re experiencing today,” Sadoff said.

Virgin Hotels Chief Development Officer Allie Hope also sees a small uptick in business at her company's hotels around the U.S., and as cities around the country start to partially reopen, operators need to be ready to take advantage, she said. 

“Fundamentally, we have to provide the jobs and make the hotels available,” she said. “We’re in a cyclical business, and we’re now starting another cycle.”

It’s still going to be a long road back to fiscal health. According to CBRE’s June forecast report, hotel occupancy could fall as low as 26.2% for the second quarter, and annual occupancy to 41%. Even a relatively rapid economic turnaround in 2021 will take time before it heals the hospitality industry. CBRE foresees the number of room nights this year will shrink 37% compared to 2019, and accommodations won’t return to pre-crisis levels until the third quarter of 2022, with revenue per available room stalling until 2023.

Virgin Hotels shut down its restaurants and bars quickly at the start of the crisis in order to help slow down the virus’ spread, including at new hotels in Chicago, San Francisco and Dallas, Hope said. But Chicago will lift some restrictions this week on businesses, a step already taken in Dallas, which now allows 25% occupancy in restaurants and bars. Virgin Hotels’ experience in Dallas so far shows that after adopting safe practices, customers will return.  

“When the bar opened, people wanted to fill it, so the demand is there,” she said.  

Stringent cleaning procedures are key to reopening any portion of a hotel, Hope added, and redesigning common spaces to allow for social distancing will also be important. But as the industry picks itself up off the ground, she advises a careful approach, one that uses the time available but doesn’t spoil what customers like about hotels in the first place.

“We don’t want to overreact; people will still want to sit with the people they came to socialize with or meet,” she said.

Clockwise from top left: Leopardo Senior Vice President Steve Smith, Aimbridge Hospitality Vice President Rich Sprecher, Virgin Hotels Chief Development Officer Allie Hope and Scarlett Hotel Group co-founder Rob Sadoff.

Virgin Hotels typically provides big communal spaces, and Hope said such zones may no longer be popular, but it also already gives guests the option of sitting in small spaces separated from milling crowds, options the company will probably expand.

Conference rooms, customer check-ins, room service and other conveniences will also have to change. Rather than collecting people into dense crowds, hotels will need the technology to host small group meetings that can be broadcast to wide audiences and provide guests touchless experiences.

“It’s something our industry has historically been far behind on,” she said.

Virgin Hotels developed an app called Lucy, which allows guests to bypass the front desk, order room service without signing for it, make reservations, check in and live chat with staff and other guests. Hope said the crisis could force the hand of many other hotels to take similar steps.

“Some may have been a bit shy to either put it front and center, or customers have been shy to adopt it or learn a new way,” she said.

The big question hanging over the market is when those customers will return. Aimbridge Hospitality Vice President Rich Sprecher said he sees signs the convention business will come back next year, as most of the now-canceled events they were counting on to bring in revenue already rescheduled.

“The majority of the business we’d lost in our meeting hotels have rebooted for next year,” he said.

Hope is cautious about predicting when corporate and business travel will return to healthy levels. She pointed out that even events six months in the future, such as Salesforce’s Dreamforce event, originally set for San Francisco in November, have been canceled.

Sadoff’s company has hotels in several college towns, including Gainesville, Florida, and Omaha, and the reopening of universities in late summer will provide a much-needed boost.

But as an independent operator of a small group of hotels, Sadoff worries about a long, slow recovery and whether big players will start snapping up struggling properties.

“There are so many sharks circling underneath, and all they want is your real estate,” he said.

Steve Smith, a senior vice president of Chicago-based builder Leopardo, said a downturn in the hospitality industry was probably inevitable, and he hopes this one, although more severe than anyone anticipated, will give the industry an opportunity to retool. 

“As we figure this out, we’ll come out strong, and there will be a lot of pent-up demand,” he said.

“We’re talking to our financing folks every day, and as soon as they give us the go-ahead, we’d like to get some deals in the ground this fall,” Sprecher added. “The worst is hopefully behind us.”