Summer vacations boost hotel occupancies, room rates. After being disproportionately impaired by the COVID-19 pandemic last year, hotels have welcomed back guests in greater numbers over this past spring and summer as postponed trips were taken. Air travel has recovered significantly from the spring of 2020 when daily passenger volumes were only about 5 percent of normal levels. That metric has since increased fifteenfold, aided by the rapid dissemination of vaccines, although about 20 percent fewer people are flying on any given day compared with 2019. This turnaround has nevertheless been able to lift hotel occupancy from a low of 24.5 percent in April 2020 to nearly 70 percent in July of this year. The summer upswing in room demand has benefited average daily rates even more profoundly. The ADR in July was $143, up about 6 percent from the same month in 2019. While part of that increase was driven by inflation and higher labor costs, nightly rates have still rebounded more quickly than many initially anticipated. Higher ADR has also gone a long way toward lifting revenue per available room back in line with records from 2019.
Return to classrooms, delta variant cloud outlook. The widespread return of in-person learning will bring back a degree of traditional seasonality to the hospitality sector as households with children are less able to travel. At the same time, the spread of the delta variant has pushed back the reopening of some offices or led to vaccine mandates for staff and customers. These conditions may curb travel further, especially for corporate events. Hoteliers are nevertheless unlikely to see the sharp drops in demand witnessed in 2020 when broad swaths of the economy were shut down. As such, hotel occupancy and ADR are expected to continue to markedly outperform relative to last year, even if demand softens slightly over the next few months. The slight slowdown may give hotels the time needed to better rebuild staffs. As of July, the total number of leisure and hospitality workers was still 10 percent below the pre-pandemic headcount. With less of an immediate need to hire personnel to meet room demand, hoteliers can take a more deliberate approach to recruiting and training.
Smaller Southeastern cities outperform. While national hotel occupancy has climbed to within a small margin of pre-pandemic levels, the pace of the hospitality recovery varies across the country. Some markets are recording property fundamentals above the same period in 2019, whereas others continue to lag substantially. Top performing hotels are concentrated in the Southeast, including cities such as Augusta, Sarasota and Knoxville as well as more scenic parts of Kentucky, South Carolina and Florida. Warm climates, low ADR, and minimal health restrictions aided visitation to these areas by local and regional travelers. At the opposite end of the spectrum, hotels in some of the country’s largest primary markets continue to face substantial hurdles. While above the pandemic-period low, occupancies in metros such as Washington, D.C., New York, San Francisco and Chicago are still only about two-thirds back to 2019 levels. A delay in some business travel due to rising infections may add further challenges to hotels in these and similar settings that cater to attendees of conventions and meetings.
More investors re-engage with hotels in the second quarter. The improvement in both room demand and nightly rates led to a marked increase in hotel investment activity in recent months. For assets priced $2.5 million and above, about double the number of trades occurred in the second quarter relative to the prior three-month period. Compared with the second quarter of 2020, when uncertainty was highest, transaction velocity is up more than twentyfold. The more widespread availability of financing was critical to enabling more properties to change hands. The added number of bidders in the market, as well as more high-tier assets trading, led to an increase in the overall average sale price to $156,000 per room for the second quarter. That is the highest average sale price in a spring quarter since 2018. The uptick in sale price corresponded with a modest quarterly drop in the mean cap rate into the mid-8 percent range. Investors were drawn most often to the Sunbelt, West Coast and Rocky Mountain regions. Popular markets included Houston and Miami-Dade, as well as Los Angeles and Orange counties. While the hotel sector is not out of the woods yet, the upswing in property fundamentals paired with more available capital should continue to drive investment activity through the rest of 2021.