Omicron Set To Make Hotels' Soft Season Even Softer, Set Back Recovery

The hits keep on coming for the hospitality industry, with the omicron variant so far looking to be less deadly than delta, but significantly more contagious. A year-end holiday period that most markets never expected to be all that busy now looks especially grim.

After a Thanksgiving week that produced better-than-expected results, to the point that hotel research firm STR reported the industry set records and outperformed 2019, the omicron variant has again pushed back the estimated timeline of recovery for many hotels, with industry perspectives coalescing around the idea that 2023 will now be the earliest business levels can return to 2019 levels.

“2022 was set to be a bumper year, with 70% of travelers globally intending to spend more on travel than they have in the past five years,” said Simon Bradley, a travel and hospitality marketing consultant who also teaches a class on trends in the industry at New York University’s Tisch Center for Hospitality. “That was based on a resurgence in confidence, and obviously that’s been hit, which is what concerns me the most.”

In CBRE’s 2022 U.S. Market Outlook report, the commercial real estate services giant projected 2022 as a year of uneven but significant recovery, especially in areas that depend on international tourism and business travel, which have recovered much less than domestic leisure travel in 2021. But counting on international travel restrictions being lifted depends on the omicron variant being short-lived. Case counts are spiking across the country while hospitalizations have increased by 19% in the U.S. over the past two weeks, The Guardian reports.

“It’s hard to feel like you have solid footing on where you stand or what to expect,” said Lodging Advisors CEO Sean Hennessey, who also serves as a clinical assistant professor at NYU’s Tisch Center for Hospitality. “And it seems like every day this week, countries are introducing different sorts of restrictions and requirements for travel. On top of that, there’s another, [indirectly affected] group that says, ‘I’ve heard about all these restrictions; it’s too much brain damage to figure out where I can go, so I’ll just wait.’”

The persistent uncertainty of the past two years has manifested for the hotel industry as a sharp shortening of the period between a booking and the actual stay, coupled with operators being forced to take a much more flexible policy with cancellations and postponements, Hennessey and Bradley said.

Traditionally, most hotel bookings for the end-of-year holiday period would have been made three months in advance. Now, it could be hard to gauge how much omicron will impact demand, because some reservations that may have been made in early December will not show up as cancellations.

“I haven’t heard from my team that we’ve had a significant impact because of the new variant,” Frontier Development and Hospitality Group founder and Managing Principal Evens Charles said. “I do expect that to have an impact on us; I’m just not seeing it quite yet.”

The frustration about Covid-19's continued disruptions is felt more acutely because of how much pent-up demand remains for travel among U.S. consumers, much of which will not be fully unleashed until the state of the pandemic becomes at least as stable as it seemed in midsummer.

A survey by travel data site Skift in October found that 24% of respondents were planning to travel in the next three months under the condition that Covid-19 is under control, Bradley said, compared to 35% of respondents who planned to travel no matter what, 18% of respondents who planned not to travel at all, and about 20% who weren’t sure.

“That 24% is the segment that is the most variable and most at risk in terms of this concern over omicron,” Bradley said.

Mitigating the impact of omicron, at least in the next month, is the fact that from late December through January, most hotels — except those in warm resort areas, which have already recovered to pre-pandemic business levels in some cases — won’t be missing out on expected rushes in business. A major exception is New York. In a pre-pandemic year, the city would expect an influx of tourists shopping and taking in holiday sights, Hennessey, Bradley and Cornell University School of Hotel Administration Professor of Finance Steve Carvell agreed. But other factors are still at play in making the slow season more painful for hotel operators.

Hotels with at least some event space were hoping companies and groups had gained enough comfort with the current environment to throw at least minor holiday parties, but Capstone Development President Norman Jenkins and Ridgemont Hospitality President and Chief Operating Officer Dhruv Patel both said their companies received fewer party reservations in their portfolios than expected.

Hotels are also among the types of businesses that have struggled the most in finding labor during the economic recovery, pushing up wages to unprecedented levels, Charles, Jenkins and Patel agreed. That, combined with delays and inflation when it comes to acquiring materials, means many hoteliers are delaying capital expenditures typically made during the slow season to get improvements done.

“We wanted to do renovations, we had capital set aside to do renovations, but who wants to do a renovation right now?” Patel said. “We want to get things together to hit the ground running in the middle of next year, to start making contracts with suppliers and furniture manufacturers when the supply chain costs start easing so we can have a big winter. But this year, it just didn’t make sense to launch all these renovations with the cost of labor and materials.”

Large, public hotel REITs have already built up enough cash and arranged for lines of credit or other debt arrangements to prevent a run of hotels entering financial distress, Carvell said. Charles, Jenkins and Patel all said they have prepared their companies in similar fashion, each expressing confidence that even if the omicron variant's effects are felt for months, hotel business will eventually return to 2019 levels.

The reasons for optimism go beyond assuming business travel will come all the way back. Leisure travelers have so far not pushed back against rates being raised and staff shortages have taught operators how to run their properties leaner. And the longer it takes for revenues to return, the slower the pipeline will be for new supply, which will be necessary considering the pandemic's outbreak happened in an environment with high levels of deliveries, Hennessey said.

If the omicron variant has already taught any lessons, though, one may be that travel and tourism's recovery depends more on customers getting used to pandemic conditions than those conditions receding, Carvell and Bradley said.

“It sort of chips away at confidence, doesn’t it?" Bradley said. “The difference with omicron is that you get the sense, in the short term, that it’s not under control. That’s the world we’re going to have to live in for the foreseeable future; we’re making judgments based on how confident we are that this pandemic will be under control.”