5 insights about how the COVID-19 pandemic will affect hotels

As the COVID-19 pandemic continues to dominate headlines, more vital insight and data analyses are being released to aid hoteliers in their decision making. Following are some of the highlights compiled by Hotel Management.

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Moody’s: Travel Industry Highly Affected in Near Term

The spread of the coronavirus will negatively affect around 16 percent of North American companies under a baseline economic scenario, but under a downside scenario, that figure will jump to about 45 percent, Moody’s Investors Service said in report published on Tuesday. Moody’s baseline scenario assumes a normalization of economic activity in the second half of 2020, while its downside scenario sees the number of COVID-19 cases surge and fear that the virus won’t be quickly contained leading to extensive travel restrictions and quarantines, as well as a protracted slump in commodity prices. The firm’s forecasts remain highly uncertain at this point.

Moody’s baseline scenario assumes coronavirus infections rise through the second quarter, leading to travel restrictions, quarantines and closures of schools, factories and businesses in the most affected countries. Monetary and fiscal measures will help support the global economy later in 2020. Under Moody’s downside scenario, monetary and fiscal stimulus won’t be sufficient to buoy the global economy, and certain key economies would fall into recession leaving sectors such as oil and gas, manufacturing and chemicals vulnerable to extensive and prolonged travel restrictions, quarantines and multiregional closures of schools, factories and businesses. Market access likely would become choppy, making it more difficult for companies to address urgent liquidity needs and upcoming debt maturities.

The rating agency’s heatmap of sector exposure shows that liquidity could be a significant concern for several industries, including lodging.

WTTC: A Call to Action

In an open letter from Gloria Guevara, president/CEO of the World Travel & Tourism Council, the association reiterated that the global travel and tourism industry is in a fight for survival with an estimated 50 million jobs globally at risk due to the pandemic.

“Travel is the backbone of economies around the world. It brings in essential currency and inward investment, creates jobs and stimulates every sector. WTTC figures show travel and tourism contributes to 10.4 percent of global [gross domestic product] and 320 million jobs. It is responsible of creating one in five new jobs and, for eight successive years, has outpaced the growth of the global economy,” the association noted.

The WTTC has called on governments of all countries to take immediate action to help ensure the survival of the industry. It calls for three things. First, financial help must be granted to protect the incomes of the millions of workers in the sector facing severe economic difficulties. Second, governments must extend vital, unlimited interest-free loans to global travel and tourism companies as well as the millions of small and medium-sized businesses as a stimulus to prevent them from collapse. Third, all government taxes, dues and financial demands on the travel sector need to be waived with immediate effect at least for the next 12 months.

LWHA Advisors: Insights on Lodging Landscape

In a letter on Monday, LW Hospitality Advisors shared some thoughts on the effects of the coronavirus pandemic, noting that information has the ability to change on an hour-by-hour basis. Some of the company’s current thoughts are:

  • Hotels are fundamentally long-term hold investment assets that knowledgeable sector-centric sponsors underwrite with an assumption of a minimum 10-year holding period. “Assumption” is the operative term. Underwriting a long-term hold does not preclude a sponsor from effectuating a compelling capital event to bake in short-term gains.
  • In retrospect, those that invested in the hotel sector during 2009 and 2010 realized short-term gains. Back then, investors that underwrote assuming three- to five-year holding periods were for the most part lucky, while those that priced opportunities assuming a 10-year hold were also fortunate, however shrewd as well.
  • Bargain air fares are not enticing travel; those that are fearful won’t travel at any price. Likewise, reducing room rates at hotels will not necessarily stimulate demand.
  • Depending on how long the global shutdown endures, most consumer and corporate debt will end up in technical default and/or monetary nonpayment. A pillar of every democratic nations’ foundation is a fluid capital market. In order to avoid the collapse of capitalism, governments around the globe will need to establish an orderly moratorium on technical default and/or monetary nonpayment of a significant number of credit instruments.

Marcus & Millichap: A Shock Absorber for the Economy

Hessam Nadji, president and CEO of Marcus & Millichap, released a statement on Monday outlining some of the firm’s insights.

“The full economic impact of reduced personal consumption and commerce is unknown. This is undoubtedly daunting for all of us; however, it is critical to remember that the U.S. economy and particularly the banking system were in the best condition since WWII leading up to this unexpected shock,” Nadji wrote in the statement.

Meanwhile, Nadji noted that the strong fundamentals of the real estate industry this late in an expansion is another factor to consider. “We simply do not have broad-based overbuilding nor overleveraging, which have been the typical cracks in the foundation in previous cycles. By contrast, the stock market appeared overextended with record prices that were not substantiated by comparable earnings in the 12 months leading to up to virus outbreak,” he wrote.

Additionally, he noted that the Federal Reserve is being accommodative. Record low interest rates and government intervention to boost liquidity are appearing to be a shock absorber for the economy. For instance, on Sunday the Fed made an emergency rate cut of 100 basis points, committed to quantitative easing and announced tight coordination with its global counterparts to shore up international liquidity. The Fed’s overnight rate is now back at 0 to 0.25 percent, where it was during the great financial crisis. Measures announced on Monday also included purchasing $500 billion of maturing Treasury bonds and $200 billion of agency mortgage-backed securities.

“Looking ahead, it would be unwise not to expect a pull-back in space demand by varying degrees and by property type. Some, such as hotels and resorts, are already feeling the pain of the measures to limit virus contagion,” Nadji wrote. “However, we believe it would be equally unwise to shift to a worst-case scenario and pure fear-based execution. Depending on the length and depth of the measures needed to reduce community passing of the virus, we could see a rapid economic recovery on the other end of the current curve.”

Fitch: North American CMBS Hotel Outlook Negative

Fitch Ratings has revised its North American commercial mortgage-backed securities hotel asset performance outlook to negative from stable/negative.

The negative outlook revision for the sector is due to several factors, including new supply and weakening economic conditions. Fitch expects revenue-per-available-room growth to flatten in 2020 and then decrease by a low single-digit percent in 2021. The impact from the coronavirus will exacerbate hotel cash flow declines and rising expenses from wages and real estate taxes may exceed revenue growth.

Hotels will be the first property type to be affected by the coronavirus due to reduced tourism and travel, and a slowdown in economic activity. Fitch expects hotel properties located in gateway cities, especially those with a large convention business or cruise line business, will be the most affected from increased cancellations and reduced bookings. In addition, hotels that have a high percentage of their revenues derived from food and beverage, and those with heavy reliance on foreign tourism will experience a greater decline in property-level cash flow. Hotels with revenue streams from casinos also likely will see deterioration in performance.