As a result of the pandemic, hotels were forced to significantly reduce expenses, including labor, which lowered the break-even point — the percentage of occupancy required for a property to remain open and not lose money.
Data from CoStar Group's hospitality analytics firm STR suggests this process was easier for full-service hotels, which typically feature restaurants and bars as well as meeting space and therefore have more expenses to cut.
In 2020, the break-even occupancy for the average full-service hotel dropped from 47% to 30%, according to Carter Wilson, senior vice president of consulting and analytics for the North America region at STR, who presented on a session titled “Keeping the Lights On: An Analysis of Break-Even Before, During and After the Pandemic” during the online Hotel Data Conference: Global Edition.
Limited-service hotels also managed to lower the break-even point, less significantly but also from a lower starting point — from 43% to 36% occupancy.
“One of the most impressive things we witnessed was the speed at which operators were forced to pivot and how well they did pivot,” Wilson said. “I can’t think of another type of commercial real estate that shifted its entire operating strategy in such a sort amount of time just to mitigate the impact of dramatic demand losses, but here we can see how cost-cutting measures were effective enough to drop the break-even occupancy levels, particularly full-service ones. That makes sense … because full-service hotels have a lot more cost centers that are able to be cut.”
Profitability was a key factor in the decisions to keep open or temporarily close a hotel, as well as when to reopen, said Monica Xuereb, chief revenue officer at Loews Hotels, who during the session presented a case study of one hotel in the company’s portfolio.
Loews Hotels has 28 hotels in its system — two of which were still in the preopening phase last year, and delayed opening. Of its 26 open hotels, 22 went into “temporary suspension of operations,” or closed temporarily as a result of the pandemic.
“We started reopening hotels around the end of May, with Texas and Florida being the first to reopen. Naturally, this was tied to the approach that those two states took in relation to restrictions, versus other states like New York and California that had a lot longer and more severe restrictions,” Xuereb said.
As restrictions were relaxed or lifted, Loews was able to assess demand indicators to determine a sensible reopening timeline for its temporarily closed hotels.
“We built several dashboards that brought together various pieces of data that gave us an indication as to which direction things were moving,” she said, noting those factors included net bookings, cancellations, leads on group business and airlift into the market.
“Another really key part of our decision-making was the [food and beverage] capacity restrictions and the restrictions on gatherings. … We’re a luxury hotel company, so if there were no [food and beverage] capabilities whatsoever, that did impact the experience we would be able to offer to our guests,” she said.
Break-Even Analysis
The company’s break-even analysis “really looked at whether we lost less money by staying closed … or by being open,” she said.
“Naturally the fixed costs were greatly, greatly reduced from normal times because there’s a lot less people on staff, and there’s less outlets open,” she said.
Those fixed costs, which don’t go away in a crisis, include insurance, utilities and, for a company like Loews, shared services such as revenue management, sales and human resources.
One of Loews’ properties, a 400-room hotel in an urban location, suddenly was facing “a pretty dire situation,” with a ban on all indoor dining and no business travel demand, which normally makes up 56% of the hotel’s business mix, Xuereb said.
However, the hotel was able to reduce expenses to the point that it only needed 10% occupancy to break even, and Loews reopened the property in July as state restrictions were loosened.
Weekend demand had picked up at hotels in the property’s competitive set, which were running at 25% to 30% occupancy, she said. The hotel also had booked some long-term stays, unrelated to COVID-19.
“We felt very confident about making it work and there was minimal staffing,” she said. “And we saw, believe it or not, catering demand return. Now it was still very limited — small gatherings — but it was really encouraging for us that people actually wanted to meet, still very socially distanced obviously with all the appropriate health and safety requirements, so that gave us some good confidence to reopen the hotel.”
Still Monitoring
Xuereb said Loews still conducts calls every other week to discuss temporary suspension of operations at its hotels.
“Thankfully, we’re no longer talking about putting hotels back on [temporary suspension], which is good,” she said, but the company continues to monitor the same demand indicators, as well as competitive sets.
She said one of the lessons the company has learned is that lowering rates does not drive hotel demand in a pandemic.
“When I look at our average rates on the books, they were down less than 10% [compared] to 2019,” she said. “There was not a need to discount for us. Flexibility was just the most important thing to customers.”
The profitability of food-and-beverage operations at the company’s hotels — even considering the restrictions on indoor dining — was also surprising, Xuereb said.
The food-and-beverage numbers “came in so much higher than what we expected, because people did not want to leave the hotel,” she said.
“They didn’t want to go out to a restaurant; they wanted to stay in the hotel while they were there and eat there. Even room service, which is normally kind of a loss leader for most hotels — we found that adding room service was even more welcomed by guests,” she said.