Hotels Get Past Awful Q2, But Demand May Not Rebound Until 2023

The U.S. hospitality industry took a major drubbing during the second quarter of 2020, suffering its lowest occupancy levels since the Great Depression.

The third quarter has seen improvement in U.S. hotel industry metrics, but it isn't clear yet how much lasting damage the pandemic-related recession has done, and a full recovery may be years from now.

During Q2, occupancy in U.S. hotels dropped 60% compared with a year earlier, CBRE Hotels reports, citing Kalibri Labs data. Such a contraction in demand meant that the national occupancy rate stood at only 28.3% for the quarter, with about 15% of all hotel properties forced to close at some point during Q2.

“Fortunately for U.S. hoteliers, indicators of market recovery began to emerge during the quarter," Senior Director of CBRE Hotels Research Jamie Lane said in a statement.  “This mini surge in demand was fueled by leisure travelers looking to escape the bonds of home quarantine for safe and healthy rural and resort destinations.”

U.S. hotel occupancy will average 39.8% for 2020 as a whole, with an average daily rate of $104.10, CBRE predicts. That means that average revenue per available room, or RevPAR, will be $41.46 for the year, which is 52.5% less than 2019.

CBRE also forecasts that U.S. lodging demand will increase by a compound annual growth rate of 14.1% over the next four years. Even at that rate, the industry won't see 2019 levels of demand until Q3 2023.

The damaged state of the hotel industry is reflected by CMBS delinquencies associated with the hotel segment. As of July, 23.4% of CMBS loans in the sector (totaling $20.6B) were 30 or more days delinquent, according to a report by Trepp, the highest percentage on record.

At the end of 2019, the number of loans that were delinquent was 1.34%, representing a total of $1.15B. Also as of July, almost a quarter (24%) of hotel-associated CMBS loans were with their special servicer. At the end of 2019, 1.81% were.

Investors seem to believe that the industry is facing a slow recovery. After Host Hotels & Resorts released its latest filing with the Securities and Exchange Commission on Monday, which noted that the impact of the pandemic might linger, its shares edged down from about $11.35 to $11.20. As recently as late February, shares in the REIT traded at over $17.

During the company's most recent earnings call, Host President and CEO Jim Risoleo detailed the company's efforts to cut costs and otherwise get through the second and following quarters.

"As lodging demand plumbed to record lows in April, we worked with our operators to suspend operations at 35 hotels, reduced hotel fixed costs by approximately 50% and reduced overall hotel operating costs by 72% year- over-year," Risoleo said.

Cost savings were partly driven by reductions in wage and benefit expenses, as well as significantly scaling down operations by closing guest room floors and meeting spaces, Risoleo said.

Now that travel is picking up again, limited-service properties are doing better than full-service hotels, The Wall Street Journal reports. They more often cater to leisure travelers on road trips, as opposed to the expense-account clientele that upper-end brands serve. With business travel practically at a standstill, the upper hotel segments have taken a harder hit.