If the U.S. lodging industry is going to achieve pre-COVID-19 demand and revenue levels, it is critical that large hotels in the top 25 markets recover.
In 2020, the average U.S. hotel lost $1.4 million in rooms revenue via a drop of 7,400 room nights. Data from the U.S. Bureau of Labor Statistics estimates that at year end, hotels experienced a 34% drop in employment, among the largest decline of any sector. All hotels, however, are not created equal, and the losses in revenues, demand, and employment have been centered in large hotels, those with 300-plus rooms.
In 2019, large hotels accounted for just 3% of all hotels and 17% of all U.S. rooms but contributed 24% of the industry’s rooms revenues and an estimated 29% of hotel employment. The largest concentration of these hotels is in urban and resort locations within the U.S. top 25 markets as defined by STR, CoStar's hospitality analytics firm.
Their impact to the industry and general economy is easy to see: In 2020, the average large hotel lost $16.3 million in rooms revenue and demand dropped by 80,300 rooms. Small hotels with fewer than 75 rooms and medium hotels with between 75 and 299 rooms experienced less of a decline, with rooms revenue falling by about $1 million, and demand dropping by 5,000 rooms per hotel on average during the year. The decline in revenue and demand by large hotels resulted in many of them temporarily closing; 38% of which closed at some point in 2020. With their temporary closings and limited demand, many shed thousands of jobs in the process. We estimate 45% of all jobs lost in the U.S. industry were by large hotels.
In January and February 2020, large hotels accounted for one-third of industry room revenue and nearly two points of occupancy. In the 10 months ending December 2020 — in other words the COVID-19 period — these hotels lost $32 million in rooms revenue, representing 38% of the industry’s total rooms revenue decrease. Additionally, they knocked off 2.4 points of industry occupancy. Over the COVID-19 period, large hotels only materialized 23% of their 2019 room revenues, whereas hotels in the other two size categories combined achieved more than 50% of 2019 room revenues. From July through October, the peak 2020 COVID-19 demand months, small- and medium-sized hotels realized nearly 60% of their 2019 room revenue whereas large hotels remained very weak, with just 27% of their 2019 revenue.
Of all the markets, the U.S. top 25 did the worse with rooms revenues, falling by $45 million during the COVID-19 period and accounting for 53% of the industry’s rooms revenue loss. Large hotels in the top 25 markets made up 26% of the total industry rooms revenue reduction during the COVID-19 months. Within the top 25 markets itself, large hotels were responsible for a majority of the rooms revenue decrease, approximately 49%, with large hotels in seven markets — New York; Orlando; Chicago; San Francisco; Washington, D.C.; Oahu Island; and Los Angeles — contributing $1 for every $3 lost in the top 25 markets.
A closer look revealed the impact to large hotels came mostly from those identified as convention or conference hotels, as they accounted for 63% of the rooms revenue decrease. Most of the decline came from those hotels in the top 25 markets, and on average, each hotel lost $25.9 million in rooms revenue during the COVID-19 period as hotels went from posting revenues of $30.8 million per hotel in 2019 to only $4.9 million in 2020. While most of the decrease among large convention and conference hotels was centered in transient business, the decline in group business was a significant driver, accounting for 41% of the rooms revenue drop in the top 25 markets.
When adding in the drop in other ancillary revenue, such as spending by hotel guests during their stay, it becomes clear that large convention and conference hotels in the U.S. top 25 markets are negatively impacting the general economy within those markets given the products, services and staff they employ within their communities. Using a 2019 study by Oxford Economics on the entire industry, it was determined that for every single job at a hotel, three others are created for ancillary, indirect and induced services, resulting in $3.53 in additional sales revenue nationally for every dollar spent for a room. Large hotels likely drive a larger share of employment and revenue creation within the top 25 markets. Full industry recovery is contingent on their revival, which in turn is dependent on the return of groups and meetings as well as city-center travel.
As we thought about the recovery, we borrowed a concept Mike DeFrino, CEO of Kimpton Hotels & Restaurants, mentioned at ALIS Winter Update: crawl, walk, run. We reviewed hotel-level occupancy for the last three months ending January 2021 and classified each hotel into three categories: Crawling (at less than 30% occupancy), Walking (between 30% and 60% occupancy) and Running (better than 60% occupancy). We found that 63% of all large hotels were crawling. In comparison, only 24% of small and medium hotels are at that stage. In the top 25 markets, 69% of all large hotels are at the crawling stage with an even higher percentage (77%) for convention and conference hotels that cater to groups and meetings.
With most large hotels at the crawling stage, recovery strategies will require much thought and will vary significantly from market to market and within markets. Given the operational complexities of large hotels, their recovery will take time as these hotels rehire, build group calendars and re-ramp. Thus, large hotels can be considered the barometer for the industry’s overall recovery and for the resurgence of the economy in the top 25 markets. Without these hotels operating normally, it will be difficult for the industry to achieve the performance it had prior to COVID-19.
Isaac Collazo is VP Analytics at STR.
This article represents an interpretation of data collected by CoStar's hospitality analytics firm, STR.