The faster-than-expected improvement in room demand seen in weekend and leisure destination travel has operators of downtown hotels wondering when they will get to participate in the recovery.
But if recent travel screening counts from the Transportation Security Administration and escalating levels of office sublet space in downtown locations are any indication, a full recovery for business hotels may still be a few quarters away.
Larger full-service or upper upscale hotels in downtown areas or other commercial business districts traditionally cater to business travelers, often in town to attend meetings or conventions. These events have been severely affected by the pandemic. In addition, as offices remain closed or open only intermittently, business travel to those offices is still affected. The amount of available sublease space in the U.S. has seen a sharp increase and continues to grow, although the rate of increase has moderated recently. In 2019, 37 million square feet of office space was available to sublet per quarter, on average. In 2021, the average quarterly amount increased to 67 million square feet.
As more companies come to terms with hybrid work schedules to retain and attract talent, less office space is needed. In addition, some tech companies have decided to forgo offices altogether. More office space is being made available under a sublease as companies reconfigure their office footprints. The implication for business travel is that, since fewer workers will be at a specific office location, travel to locations for meetings will be curtailed and workers will interact online, just as they have been doing for the past two years.
Occupancy of upper upscale hotels in urban locations has recovered since 2020, but in the last quarter of 2021, average occupancy was still 27% below the comparable level in 2019. The increases in available sublet space could affect expectations for a more pronounced recovery in upper upscale demand in urban locations.
A second indicator that sheds light on room demand for business travel hotels is the daily passenger count tracked by the TSA. Traditionally, room demand on Tuesday and Wednesday, or midweek, is driven primarily by corporate travelers who often fly to attend meetings or meet with clients. Quarterly data for midweek passenger counts at airports shows a significant improvement compared to 2019. Still, the number of flyers in the last quarter of 2021 was 20% below two years ago.
Midweek room demand for U.S. hotels also improved but, similar to air passenger traffic, was still 13% below pre-pandemic levels in the last quarter of 2021. This is the same performance level seen in the third quarter, possibly hinting at a recovery plateau.
The combination of increased office space sublet availability and lackluster midweek TSA passenger count improvements could indicate a slowing business travel recovery. Full-service hotels in downtown locations would be affected if these trends continue to hold. The upcoming first-quarter performance results will shed more light on the data and point to an accelerating or decelerating pace of demand recovery.