HENDERSONVILLE, Tennessee—The weekly U.S. hotel data pointed in the direction of an apocalyptic KPI decline in April and the monthly data paints a picture of an industry in the depth of a recession.
In March I wrote that “RevPAR declined 51.9%, the steepest monthly decline we have ever recorded in our 35-year history.” Then April came along and said: “Hold my beer.” U.S. hotel RevPAR decreased 79.9% in April.
1. Realities of recession
Source: STR, © 2020 CoStar Realty Information, Inc.
When people ask how this pandemic compares to 9/11 or the Great Financial Crisis (GFC), the chart above shows all you can say is: “it does not.” The Global Coronavirus Recession (GCR – a term that Oxford Economics uses, and I will adopt) is different, and by different I mean worse. But it is also different because it is an economic crisis in times of a global health emergency. Any economic metric you want to look at—from unemployment to stock market gyrations to room demand drop to RevPAR decline—is unprecedented and therefore it is a bit unhelpful to study prior recoveries as a guide.
But it seems from our weekly data that the week of 11 April recorded the steepest demand and RevPAR declines and since then we have seen slight improvements all the way through the week of 16 May.
Source: STR, © 2020 CoStar Realty Information, Inc.
So, the May data may not be better but can be classified as “less bad.” Now, of all this is happening of course against the backdrop of the COVID-19 cases in the U.S. continuing to rise and accounting for one-third of all global cases.
2. Supply declines
A quick note about supply: It declined 12.1%. STR, parent company of HNN, rules dictate that rooms must be closed for the calendar month—and by that we mean we receive less than five days of data in the month—to be taken out of the supply picture. Quite a few more properties than the roughly 3,500 hotels that we closed were temporarily closed. We are working on a few methodology changes and enhancements to allow our clients a full view of what was open and what was closed for parts of the month. Taking those closed hotels into consideration, occupancy was 24.5%, so on paper three of four rooms are empty, but the reality—when considering the closed rooms—is starker.
3. A bleak 2020 RevPAR forecast
We expect that occupancies will basically be cut in half and that room rates will drop by over 20% to equate to a 2020 RevPAR decline of 57.5%.
Source: STR, © 2020 CoStar Realty Information, Inc.
One comment on the “Economic Supply.” This is a new metric, named by David Loeb, formerly a Baird investment banker and longtime supporter. The idea is basically to disregard the fluctuations in supply by the temporary closures because it will make the year-over-year comparisons impossible as the room supply next year will be normal again. Keeping supply somewhat constant and assuming all rooms are open (but accounting for the regular new openings and certain rate of total closures) make the math in the coming years easier and the outcomes more comparable. This is how our clients are doing it and for the national numbers that is how STR is doing it.
Please keep in mind that using the temporary closures or using full supply is not inherently wrong or right. Both approaches serve their purpose depending on if you are looking at a STAR report or a Total U.S. forecast. That is why we are showing both numbers but are only using and calculating economic occupancy and RevPAR. It is easy to do the math on the regular supply with temporary closures; the KPIs will clearly be higher when the denominator shrinks.
Here is the math to show the actual KPIs:
Source: STR, © 2020 CoStar Realty Information, Inc.
In 2021, we expect that basically half of all rooms are still empty, hence the rather uninspiring ADR projection of a 1.7% increase, which equates to $2.
Comparing the 2021 data to 2019 shows that even next year’s results will still be almost 40% below where they were last year. Last time RevPAR was around $55 was ten years ago.
In other words, one year wiped out a decade of RevPAR improvements. As we say in German: “Yikes.”
4. Class data
To get to a national RevPAR decline of around 80% implies that a few hotels and classes must have done worse. And indeed, the big boxes did much, much worse. That is also where we recorded the most room closures. Here is a detailed look at the supply percent changes by class:
Source: STR, © 2020 CoStar Realty Information, Inc.
Almost half of all luxury hotel rooms were offline and one-third of all larger upper-upscale hotels were as well. These were the hotels where the owners made the heartbreaking decision to basically furlough all staff, maybe with the exception of the GM, a security and sales person and an engineer. Then you have another uncomfortable chat with your lender to tell them that you cannot pay the mortgage since you have zero revenue coming in.
Occupancy for luxury and upper-upscale hotels was in the single digits and RevPAR declined by more than 90%. But since we accounted for temporarily closed hotels—so this is not economic occupancy—the occupancy for the industry was much lower if you take all rooms into consideration. As I said before, neither approach is wrong, it just depends on what you want to talk about. The combination of stay-at-home orders, no corporate travelers and no group travelers is borne out in our data.
Source: STR, © 2020 CoStar Realty Information, Inc.
The lower-rated segments held on a little bit better. The economy-class occupancy exceeded 40%, implying resilience and a steady stream of demand that we normally do not talk about since it does not really move the needle: construction crews, airline crews, people switching jobs moving into new cities, people getting divorced or in the middle of other life transitions, but also people who just live in hotels and homeless populations. Other room demand came from hoteliers selling their rooms for day-use to parents who just cannot, cannot, cannot handle another episode of “Daniel Tiger” or “Thomas the Train” and use the hotel guestroom as office space. The Four Seasons in NYC opened their doors to first responders and in the process developed many of the cleaning protocols that will from here on be standard procedures for hotels across the land.
5. Pipeline data
The number of U.S. rooms in construction increased another 8,000 rooms from last month and now stands at 220,000 rooms. We had expected something like this as projects that were “shovel-ready” started. This continued increase could go on for a month longer, but then it is very likely that the room counts will drop as the rooms that open are not backfilled by new projects.
Source: STR, © 2020 CoStar Realty Information, Inc.
We’ve charted the projects that were abandoned or deferred and there were some in April, but the count did not rapidly increase as I had suspected.
Source: STR, © 2020 CoStar Realty Information, Inc.
I guess one way to read this that there were quite a few marginal projects that only made sense in the best of times and when the global economy came to a halt, so did those projects. That scratching sound you hear is analysts sharpening their pencils trying to figure out if their respective projects still make sense in a post-COVID-19 world or if those projects should end up on the cutting-room floor as well. I would fully expect that the deferred count will move up as some projects get shelved for better days.
One-time bonus chart
Robert Bauer from STR’s London office made this chart, which is in the top 5 coolest charts we have ever put out:
Source: STR, © 2020 CoStar Realty Information, Inc.
Isn’t that just a piece of art?
Jan Freitag is the SVP of lodging insights at STR.
This article represents an interpretation of data collected by STR, parent company of HNN. Please feel free to comment or contact an editor with any questions or concerns.
