Taking off: Industry rebounds at a better-than-expected pace

When 2021 began, there was a seemingly endless number of questions surrounding the hospitality industry and how the year would go.

Would the rollout of COVID-19 vaccines continue at a pace that would make a real difference? Would the predicted pent-up demand for travel cause people to get back out on the road? Would group and business travel ever return?

While all of these questions and many more have not been fully answered, the first half of the year has provided a clearer picture to what hospitality looks like, and has made predicting what happens next a little bit easier.

With so many of those questions remaining unanswered, the first quarter of 2021 looked very much like most of 2020, but starting in Q2, everything started getting considerably better.

Vaccines roll out
A major contributor to the return of travel has been the successful rollout of the various COVID-19 vaccines, which, at the beginning of the year, was moving slowly. As vaccination rates rose, many local governments began to lift social-distancing restrictions.

Domestically, the vaccine rollout has already provided an “incredible boost to travel,” according to Bram Gallagher, senior economist, CBRE Hotels Research. “We were expecting that the second half of the year was going to pick up meaningfully, particularly in leisure travel, and that has been advanced by the way that the vaccine has been distributed so well across the U.S.”

“When you think about it, the whole key to opening up, jumpstarting businesses and getting people traveling again was always about getting people vaccinated,” said J.P. Ford, SVP/director of global business development, Lodging Econometrics.

Jay Stein, CEO, Dream Hotel Group, agreed with Ford, saying that the vaccine rollout helped to alleviate some of the fear of travel caused by the pandemic. “We may not have gotten there as quickly without the vaccines or a strong rollout,” he said. “If people feel safe enough that they can go on planes, when they get somewhere, they need a place to stay. That is where we come in. A lot more people have gotten comfortable in the last 60-90 days about getting on planes and taking long trips.”

With the fear alleviated, people are ready to get on the road again. “People are realizing how much they missed travel and seeing people,” said David Eisen, director of hotel intelligence, Americas, HotStats. “There is this huge pent-up demand for it. We have seen it in the past months. I know that summer is going to be big, but we even saw this in the past months with the drive-to markets and resort destinations.”

The tide turns
The rollout—and the opening of some travel restrictions because of it—began to affect the numbers in Q2. “We went from a RevPAR of about $42 [in Q1], to a RevPAR of almost $51, which is a pretty big jump,” said Cindy Estis Green, CEO/cofounder, Kalibri Labs.
She anticipates Q3 to be the best quarter of the year—and even better than was originally predicted at the beginning of the year. Kalibri is forecasting RevPAR for Q3 to be about $65, which Estis Green said is strong.

“At the end of Q1, we thought we were looking at a year-end RevPAR of about $51,” she said. “Now that we had a much sunnier Q2, our RevPAR forecast for the year is $56.78. We went up more than $5, which is a lot. Q2 was substantially better than what we expected.”

While these projected numbers do indicate better-than-predicted growth, Estis Green pointed out that these numbers still pale in comparison to 2019’s RevPAR of $87. “In 2020, we dropped 52% and that put us at $42,” she said. “We expect we are going to be at $56.78 for this year. That is a big jump from $42 last year, but the distance from $87 is not going to happen in a year.”

She indicated that all chain scales are expected to improve RevPAR compared to 2020, with economy and midscale expected to come closest to their 2019 numbers.

Leisure is back
The growth so far has been substantially fueled by the predicted pent-up demand for leisure travel.

Kalibri Labs has introduced a new Commercial Leisure Index that looks at the ratio between commercial and leisure travel and the rate of growth of commercial versus leisure. “For the U.S., the rate of growth is indexed against 2015 to see how things are growing,” explained Estis Green. “Leisure is growing at the same rate as it was in 2019. I don’t mean the actual absolute amount, but the rate of growth—the improvement of it—is growing at that rate.”

If the advanced booking numbers for the July 4th holiday weekend are any indication, leisure travel in the U.S. truly returned. (Actual numbers were not available at press time.)

Data from the MAPP Report, powered by myDigitalOffice (MDO), showed that hotel occupancy was nearly double the level of what was reported the same time last year for the holiday weekend in 2020. In the weeks leading up to July 4th in 2020, U.S. occupancy for the weekend hovered around 10-15% before peaking at 25% at the one-week-out mark. The weekend finished at just over 32% occupancy.

As of June 29 thid year, U.S. hotels were nearly half booked; occupancy had eclipsed 25% five weeks out from the holiday weekend.

“Travel demand, at least in the leisure category, is officially back,” said Matt Curry, chief revenue officer, MDO. “Actual business on the books for U.S. hotels for the upcoming 2020 Independence Day holiday weekend was at 25%. Considering that we were in the middle of the first major peak of the spread of COVID-19, that was still considered a green shoot by most in our industry, myself included.”

This surge in demand has resulted in ADR holding strong this year.

“Whereas last year we saw significant drops, week over week, as we got closer and closer to the big holiday weekend event, [we haven’t seen that this year],” he said. “That’s a big sign that we are well on our way to recovery.”

The report also found steady increases in occupancy, RevPAR and ADR across all classes. As of June 29, 2021, midscale hotels are currently leading the pack with more than 50% occupancy, although all other classes are on the cusp of that same level.

In addition to the improved July 4th numbers, Curry reported other improvements in the leisure area that point to recovery. “The hotel booking window has steadily increased in a big way,” he said. “And the spread of hotel occupancy performance across chain scales has leveled off. Last year, economy and midscale hotels dominated that category, while the rest of the pack struggled mightily. For months now, it’s been much more of an even spread, which is great to see.”

These forward-looking hotel performance metrics suggest that leisure travel in the U.S. will be back to 2019 levels in short order, according to Curry.

As they did in 2020, Estis Green believes that the resort and destination market-type hotels will continue to do well. “Their average rates are within 10% of 2019,” she said. “Their occupancy is maybe 10-20% down, but that isn’t much. When we parsed it out by type of resort, Florida and Eastern Atlantic were super strong. Those markets have done extremely well. California resorts are slower to come back, mainly because California was slower to reopen.”

With travel increases, Gallagher said that CBRE has increased its outlook for independent boutique hotels. “We have upgraded the upscale outlook in the longer term just a little bit because it is a popular, strong segment and it is in a big way fueled by the upper tier of the leisure traveler,” he added.

Dream Hotel Group’s Stein said he is excited by what he has seen in terms of stays at his properties. “We have been seeing really good movement in a number of markets, particularly in Miami, which has been on fire,” he said. “Hotels in Hollywood and Nashville are seeing a quicker and earlier pickup than we are seeing in New York City.”While those markets are faring better than the Big Apple—where three of the company’s properties had been closed until recently—he said that the city is bouncing back more quickly than he expected. “We did 96% occupancy at the Dream Midtown on [a recent] Saturday night with a $215 ADR,” he said. “We didn’t think we would be talking about those kinds of numbers. Saturdays are always our strongest demand, but even [in mid-June, we were] over 100% higher than we had anticipated. We thought we would be in the mid-20s to around 30%. We are more around 50 to 60% occupancy coming out in the first four weeks, so we are excited.”

Business (travel) isn’t booming…yet
But, for a city like New York, and most of the hotel industry, business travel needs to rebound—something that has not happened at the same level compared to leisure—and is not expected to for some time still.

“I don’t want to be like Debbie Downer in that ‘Oh it is going to be such a long road to recovery,’ because we have seen a lot of improvement,” said Estis Green, “but there is a whole sector of the business—the commercial side—that U.S. hotels have depended on for a very large percentage of the total revenue.”

“Business travel is coming back,” said Ford. “It is coming back slowly, and it will continue to come back slowly for the rest of the summer, but I think it will really begin to pick up right after Labor Day.”

Companies are being very cautious about putting employees back on the road—and even bringing them back to their offices. “Businesses are going to take a very cautious approach with their employees and the idea of travel is, ‘If you absolutely have to go, then go,’” he said. “‘If it can be done through Zoom or some other virtual means, then let’s try to get it accomplished through that.’”

That caution has shown in the numbers. “Commercial is substantially below [what it was],” said Estis Green. “It was growing 10% year-over-year, and we are still below. We are at 70% of that growth rate. It is well below the growth rate we were at pre-COVID.”
Leisure has been outpacing commercial for most of the year. Estis Green said that if overall occupancy has gotten to 60%, 30-35 points of that occupancy are coming from leisure and perhaps 20 is coming from commercial. “It is substantially more contribution from leisure,” she added.

While not all markets are back to typical contributions from business travel, Kalibri Labs’ Commercial Leisure Index found that the lower-tier, interstate highway market and its local corporate account business has fared better. “Any of the commercial growth is coming in the lower and the middle tier,” she said. “It is coming from local corporate accounts and small groups.”

But until large companies like Deloitte and Microsoft or the pharmaceutical companies begin to travel at a pace previously seen, Estis Green said, business travel will not reach its normal levels.

“It all comes down to the dependence on big commercial business, not local corporate accounts, but major corporate accounts, both their group and transient business,” she said. “How quickly will those corporate accounts decide to let their teams get back on the road? They managed fine through COVID, so those CFOs see that they saved a lot of money. We are going to have to think of commercial business in a different way than we thought of it in the past.”

Chip Rogers, president/CEO, AHLA, believes there are two things that need to happen for business travel to come back to previous levels.

The first is that businesses that initiated travel cuts did so for only the first half of the year, opening up the budget for the second half.

He is also expecting that the person at any organization who plans business travel has gone on vacation during the summer. “If they see and feel that it is safe and easy to do, then they are much more likely to resume business travel when they get back into the office in the fall,” he said. “We are hoping those two things—that the resources are there, and people feel safe and comfortable because of the family vacations that they have taken—happen. We hope that spurs travel.”

While business travel is expected to pick up somewhat as the year goes on, the hotel industry will be doing its part to make that happen. Several events, including the American Lodging Investment Summit (ALIS), AAHOA Convention & Tradeshow, The Lodging Conference and the NYU International Hospitality Industry Investment Conference are scheduled in the next few months. “We are in constant contact with the other shows, and as you make your way into the summer and particularly into the fall, you are seeing the pre-registration numbers begin to rival what you saw in 2019,” said Rogers. “For those events that have been planned, I think they are going to be in good shape.”

Rogers also said that major conferences are important in the creation of industry jobs, adding, “You need these large events to generate the food and beverage jobs, because your typical leisure traveler is not going to necessarily eat in the hotel, they are going out to restaurants…but for those food and beverage jobs in a hotel, you need large gatherings of people who are willing to eat in the ballrooms.”
But are there are people to fill those jobs?

Labor crunch 2.0
Before the pandemic even began, hotels across the country were having major issues finding labor to fill positions. Then the pandemic hit, and the industry had to lay off or furlough half of its employees. Now that travel is coming back, finding people to fill positions have become an unexpected problem—with potential to affect the industry comeback.

In some cases, former hospitality workers have completely left the industry—either for jobs in other industries or to become entrepreneurs—or some have chosen not to work at all because of enhanced COVID-related government benefits.

Rogers said that this labor crunch is a lot worse than the one before the pandemic. “The challenge that people are facing really hits us from a number of fronts,” he observed.
Hotels are beginning to see their occupancies rise, but they may not have the staff to accommodate all of those much-needed guests. “It is doubly frustrating recognizing that, in some cases, people are having to make the decision to shut things down because they don’t have enough labor,” he said. “That is very painful because that revenue is desperately needed.”

Eisen believes that many who left the industry viewed it as more of a job than a career. “They will go to work at Walmart or Amazon, where they could get a better job or wage,” he said. “They may have moved out of the area to a state or city that has a higher minimum wage. It is putting pressure on wages, and you are not going to be able to get that person for minimum wage. You are going to have to kick a little more in. That is ultimately going to depress the bottom line.”

Employers will have to figure out how to staff their hotels. “If it isn’t staffed, your labor expense might be lower, but you might be turning off or losing future clientele because they are not getting the same service that they are used to,” Eisen said.
While the enhanced government benefits are set to end in September—which may lead to more jobseekers—that doesn’t help fill positions during the busy summer season. But, again, there was trouble filling positions even before the pandemic.

Stein believes that raising rates in order to raise wages may be necessary. “It is not going to be an industry that survives by paying people more, but not lifting rates and not making money,” he said. “That is not business; you have to make money in business.”
Hoteliers will likely have to make changes to the level of service they offer guests. “We are going to have to figure out as an industry what level of service we can provide for the ADRs that we have, and what level of service the customer is going to be willing to pay for going forward,” said Gallagher. “That is a challenging question.”

Dream Hotel Group’s Stein agrees that taking a look at what services are offering may be necessary—perhaps taking a cue from the airline industry. “You can be sure if the people who ran airlines ran the hotel business 20 years ago, guests would be paying extra for each night they cleaned your room, just like you pay for your luggage and where your seat is on the plane. It doesn’t matter because people still need them and fly.”

Eisen also sees a move toward the airline model. “What the crisis has done, for better or worse, is you will see some efficiencies come out of this,” he said. “When I say efficiencies, I think of the need for daily housekeeping. I think that is going away. This is a chance for them to rework the operating framework and say, ‘Why can’t we be more like the airline industry and start charging for some of these amenities.’ Daily housekeeping was never thought of an actual amenity, it was just thought of as something that you was part of the stay. Brands or hotels may now say you have to pay for the daily service.”

Gallagher reported that in the current construction pipeline, the most interest is in select-service because of the lower labor requirement. “We might see more conversions about moving away from full-service hotels,” he said. “That is a longstanding trend that is certainly being exacerbated, but I think there could be some headwinds for occupancy moving forward and some influence on rate increases because of these kinds of expenses.”

Even with the change to a different service model, Rogers said that the AHLA is looking into what is causing the latest labor problems—and ways to help its members attract prospective employees. “We have begun a case study of five major U.S. markets with in-depth research to determine why people are not choosing the hospitality industry,” he said. “We also just started virtual job fairs to try to figure out what works and what doesn’t. We are beginning an online campaign to accentuate the positives of joining the hospitality industry. We will take everything that we learned, and we will share it with our members across the country and maybe they can replicate it in their own markets.”

Bleisure travel
While business travel isn’t where it has been before, the fact that employees still have the ability to do their work from anywhere means that combining travel with business will still continue to be popular—and provide a silver lining to hotels.

“There is going to be an opportunity to add Fridays and Mondays working remotely and we may get longer stays,” said Estis Green. “You can’t really call it business and you can’t really call it leisure because people may be kind of working, but they choose to be somewhere else for whatever reason.”

Rogers agreed that Mondays and Fridays will be stronger than they have previously been. He said that AHLA is working with its members to attract guests who are looking combine work and leisure in their stays “Things like grab-and-go meals may be here to stay for a while,” he said. “Expanded access to internet and better internet services are absolutely critical.

Supply challenge
One area of concern for CBRE’s Gallagher is the increased supply of hotels that have come on the market since the beginning of the year.

“Supply has gone forward in a more dramatic way than we had expected,” he said. “We had 2.2% supply growth year-over-year in Q1 of 2021, which is the higher quarter-over-quarter supply growth nationally since the Great Recession. Supply growth of 2% or higher is typically when we start seeing occupancies decline.”

High supply growth is also expected for Q2 and Q3 because of delays caused by the COVID outbreak. “We will start to see a little respite in that, but we are still expecting pretty high supply numbers in 2021, and that is going to be a bit of a challenge for occupancy,” Gallagher noted. “We have upgraded our demand outlook certainly because of the positive views on vaccinations.”

Moving Forward
While the numbers have been encouraging and better than originally forecast, the hotel industry is still recovering from one of the worst crises in history. “It is important to put it into a historical perspective,” said Rogers. “First off, 2020 and the damage that was done is going to last a long time. Even through May of this year, you are still looking at 21 of the top 25 markets in recession or depression compared to 2019. We think June numbers are going to look a lot better, but through the first five months of the year, the industry was still at a very dangerous place.”

Ford said that the industry is on the right trajectory. “I think things are going to continue to improve and we will ultimately get there,” he said. “The key is continuing to get people vaccinated and continuing to talk about travel, take vacations, go on business trips. A lot of that churning within the industry will be what drives occupancy and rate and strengthens the health of hospitality.”