At the 2020 Hotel Data Conference, held online this year due to the COVID-19 pandemic, STR President Amanda Hite shared a grim forecast for the U.S. hotel industry. “The good news is it's not very different than our June forecast,” she said, “but it is slightly worse than what we had forecast at the end of June.”
According to data from STR and Tourism Economics, full recovery in U.S. hotel demand and room revenue remains unlikely until 2023 and 2024, respectively. As a sign of just how far levels have fallen year over year, the 40 percent demand decrease STR is projecting for Q3 2020 will be a substantial improvement from the 57 percent decline the industry actually saw during Q2. “Even with a slight improvement in [average daily rate] projections through 2021, pricing confidence will lag an eventual rise in occupancy,” Hite said in a statement released during the conference. “As a result, the $32 billion gain we forecast for room revenue from 2020 to 2021 will push the industry to a level that is still 32.5 percent lower than 2019.”
Sourav Ghosh, EVP of strategy and analytics at Host Hotels & Resorts, said he was more concerned with revenue per available room than with occupancy. “From an ownership perspective, revenues matter, and really, what flows through from the revenue still matters regardless of occupancy and rate,” he said. “You can look at occupancy, rate [and] demand but ultimately it's what revenues are you really getting and what's flowing through to the bottom line.”
Total Room Inventory
The pandemic has affected hotels so severely, Hite said, that STR needed to come up with a new methodology to calculate market occupancy in areas with many closed hotels. The standard STR methodology measures occupancy of all the open hotels in a market; tracking realized demand against realized supply and excluding temporarily closed rooms that could not be booked. Since this metric does not measure the total potential occupancy of a market—the number of rooms demanded as a percentage of the total number of rooms existing in a market—STR launched its Total-Room-Inventory methodology earlier this month. This methodology takes realized demand and divides it by the total number of rooms in a market regardless of operational status—the market’s total room inventory. “When you look at a market with a lot of closed hotels, you'll see that a total room inventory occupancy is a lower occupancy because it takes into account those closed hotels,” Hite said.
Ghosh finds the new measurement system handy—“certainly from a sales and revenue management perspective to look at just the occupancy of the hotels that are open, to see the demand that we're actually capturing in a specific market, and whether we're getting our fair share or not. So that becomes pretty critical on a day-to-day revenue management perspective and running the business,” he said.
Occupancy & Opening
While each hotel’s threshold for closing or reopening is different, Ghosh estimated that for a company like Host, a portfolio’s properties should have occupancy between 10 and 15 percent to reopen. “And we are looking for that occupancy for at least a somewhat sustained period of time, when we look at forward-looking bookings so at least a 30-day period,” he added. “Obviously the booking window has really shortened, so that becomes a little challenging, but so far we have been pretty successful in our reopening strategy of the hotels we had suspended.”
Looking at breakeven EBITDA, he continued, assuming that rate year over year was down about 15 percent, the occupancy would be 35 percent on average to break even at the hotel EBITDA level. “If the rate was down 30 percent year over year, the occupancy required would be 10 points more, so 45 percent occupancy.” Host, he said, has worked with the brands and managers of its hotels to reduce cost at the property level so that they could reach breakeven occupancies as quickly as possible.
With travel patterns changed so drastically, the normal top markets may not dominate as they once did. “We're talking about areas of the country with the highest occupancy rates that we certainly would not normally be talking about,” Hite said. “It's the other markets outside of the top 25 that are performing much better than the top 25, so that'll be the story for the rest of the year.”
Similarly, the industry will need to look to the leisure market to make up for the lack of groups and events hotels normally host. “We're seeing that in the recovery that we have had since Memorial Day,” Hite said. “That's where the demand will be. We had all hoped for some more corporate travel demand and maybe some small group meetings, but those are really off the table as you look at case numbers across the country.”
The industry, she added, is looking for ways to hold meetings and events safely. “There is still a need to be in-person for business, and our industry needs that business in our hotels,” she said. “We can't just go on domestic leisure for forever. We've got to have business travel back and then ... we've got to get group meetings back.” But real group travel won’t return until next year, she acknowledged, and if the pandemic continues—or gets worse—that prediction of recovery by 2023 could have to be pushed back again.