By Tom Corcoran
The current COVID-19 crisis will end. When? We don’t know. We are optimistic, hard-driven hotel people who consider ourselves capable of managing any crisis. We have done it before—during the oil embargo of the 1970s, real estate crisis of the late ’80s, 9/11 and the Great Recession of 2008/2009. During each of the crises we did not exactly know when we were getting out of the crisis, but we did, and we prospered each time when it was over. We are in the middle of the current crisis and not sure how we are going to get out of it, but we will. The end is near—but we just do not know how long it will take.
During the COVID-19 crisis, we are learning how to operate better and more efficiently. We have redefined what cleanliness means, as well as a customer’s sense of security. We have asked our employees to do more with less than we ever have before. Directors of sales and general managers have to wear all hats, from working front-desk shifts to driving the van. Our essential workers take the risk of going to work every day.
Our industry has risen to the challenge across the board like we have done so many times in the past. We practice what we preach, and are working harder than ever to get back to breakeven and paying debt service. General managers clearly understand the importance of being able to make debt service and have demonstrated a real understanding of ownership challenges. Everyone is more focused than ever before on every detail/expense. And doing more with less than ever imagined. Employees have been the true heroes. Housekeeping costs have risen while, at the same time, there is less cleaning because daily room cleaning has changed. This is another area where we could see more of a permanent change. We hope to rebuild our hard and soft equity and when this crisis is over, we will once again re-create the value we thought we had prior to the crisis—plus some.
Free breakfast has been disrupted because of the coronavirus. Health concerns and the future of the open-food area is now in flux. It will be interesting to see how food presentations and options evolve because costs had gotten out of hand and there will be continued margin pressure.
The loss of the business traveler and meetings/group business has had the greatest impact on our loss in RevPAR compared to prior year. Frequency programs have been built on the business traveler, and hotels today are looking for different room demand from government, crews and college students, along with a lot of the demand being booked by the increased reliance on the OTAs
The debt markets are in disarray as they have been in past downturns. Hotels are the first to get hit and, most likely, the last to come back for financing. It may be into late-2021 before we see the big banks getting back into the markets. I am not sure about the long-term impact of this pandemic on underwriting, but I expect to see the potential of interest reserve and greater equity requirements. The public markets have bounced back from the bottoms where they were at the beginning of the pandemic. Nevertheless, most REITs are trading at deep discounts to year-end 2019. This is how it has happened in previous downtowns, and history has shown they will come back. However, the stock prices have declined far more as compared to the underlying value of the hotels. Overall valuations have declined in the private market, but there is a big spread between bid and ask. I do not see this coming into focus until later in 2021.
Some of the values may depend on how the CMBS market deals with its loans, and what we do not want to happen is to see a bunch of hotels on the market at once, driving down the asset prices across the board. I think we learned from the Great Recession that lenders acting in a rational manner with good owners and operators will come out much further ahead when the industry returns to positive RevPAR growth.
The brands have—overall—been very responsible and reasonable so far. The franchise model is the core base of our industry. Franchisors have delayed capital plans along with working through payment plans with franchisees as the industry got hammered in March and April. I believe the brands will need to continue to work with owners for the next couple of years as the industry returns to profitability while meeting the needs of our customers.
COVID-19 is the worst crisis the hotel industry has ever faced. No one predicted it, and I know of no one who modeled such an event in their proforma. But we got what we’ve got and now we must deal with it.