Outlook on recovery: Guidance for revenue managers (Part 1)

(This is the first of a two-part blog post: Tomorrow, find out how to identify the key economic signals of a recovery.)

There is no question that the global impact of the COVID-19 pandemic is unprecedented. Even for seasoned practitioners, this event came as quite a shock as demand dropped precipitously and many properties closed.  One thing is certain: It’s likely to be different on the back side of this event, but there is hope and there are some things a revenue manager should know that will illuminate the path to a speedier recovery.

The current situation

According to CBRE Senior Managing Economist Jamie Lane, the lodging industry will face two significant headwinds in the near term: the continued need for social distancing and a contraction in overall economic activity. CBRE estimates that overall RevPAR will decline by 37% in 2020, driven by a contraction of more than 60% in Q2. Prior to the COVID-19 pandemic, CBRE had forecast a 0.1% decline in overall RevPAR. 

Changes in annual RevPAR are expected to be worse in 2020 than those which economy experienced in 2001 and 2009 combined. However, according to CBRE, the economy should rebound quickly and more energetically due to a resiliency in travel demand and a strong hotel revenue recovery plan. Further, CBRE estimates RevPAR could recover to stronger than prerecession levels by 2020.

Source: CBRE Hotels Research, STR, March 2020
Source: CBRE Hotels Research, STR, March 2020

CBRE concludes that as the pandemic slows down, hotels should start to stabilize in the third and fourth quarter of 2020, with estimated growth for 2021. This is further illustrated in the chart above as 60% of the 36.9% decline in RevPAR is in 2Q2020.

While the start of a recovery in the third quarter is encouraging, it should be noted that there is concern by some industry leaders that U.S. hotel occupancy did not fall as quickly as other countries, which means a lot of people were still traveling. The movement of people is a factor that could continue to spread the virus and prolong the pandemic, thus delaying the start of a recovery (Sorrells, 2020).  The continued monitoring of US travel patterns and rate of new infections will be important to understanding the trajectory of the virus. Government-issued stay at home orders, quarantines and social distancing action taken by individuals will likely contribute to quick declines in industrywide occupancy rates in the near term but could lead to a more rapid recovery.

Of course, this isn’t the first time the U.S. hospitality industry has experienced significant shocks, so let’s see what we can learn from our past.

Historical demand shocks: SARS

In November 2002, the first case of SARS was reported in Guangdong, China. By March 2003, an alert for China, Singapore and Vietnam was issued. WHO announced that SARS had been contained by July 2003, approximately nine months from the first report of infection to containment. The following chart illustrates ADR and occupancy as a result of the outbreak, with the lowest occupancy month being May 2003, at approximately 18%. It is important to note how quickly ADR and occupancy recovered once the virus was contained.

Mainland China hotel performance (pre- and post-SARS outbreak) 2002-04 (absolute occupancy, absolute ADR) | Source: STR, February 2020
Mainland China hotel performance (pre- and post-SARS outbreak) 2002-04 (absolute occupancy, absolute ADR) | Source: STR, February 2020

Note that October occupancy performance year over year (YOY) was almost the same as pre-SARS, and ADR grew the following year. Additionally, the data indicates that recovery can occur quickly if a pandemic is well contained and consumer confidence begins to return. If the COVID-19 follows the SARS history, it would mean the hotel industry in the U.S. could be re-stabilized prior to the end of 2020.

Historical demand shock: 9/11 and the September 2008 financial crisis

A study by Cornell University in cooperation with STR used data from 34,695 hotels from 2000-09 and analyzed changes in RevPAR for U.S. hotels in the upper-upscale category after 9/11 and the September 2008 financial crisis (Enz, Kosova and Lomanno, 2011).

The study found that upper-upscale hotels recovered RevPAR within four months from both events, and concluded that the terrorist attack had a stronger and immediate negative impact on RevPAR than the financial crisis of 2008. The authors argue that the financial crisis had a longer duration and there was a sharper decline two months after the event due to the fall of Lehman Brothers. Both events performed in very different ways.

Again, one of the key drivers of recovery in these two cases was consumer confidence. Once the government had taken certain security measures after 9/11, consumer confidence started growing and RevPAR began to recover. In contrast, there was prolonged uncertainty surrounding the financial crisis, which lead to a continued decline in RevPAR before eventual recovery. 

Based on this analysis, it could be concluded that once the economy starts to recover, with government assistance, RevPAR performance would behave more like 9/11 economic shock versus the 2008 financial crisis. Either way, historical data suggests that luxury and upper-upscale properties experience the worst hits but also recover fastest.

The chart below illustrates the RevPAR changes for U.S. upper-upscale hotels.

Source: STR, Cornell University, February 2011
Source: STR, Cornell University, February 2011

In broader terms, CBRE data suggests that demand for the entire U.S. hotel industry (all classes of hotels), starts to realize recovery within seven months from the event. Economy and midscale hotels were slower to recover than upper upscale and luxury hotels, according to the Cornell study, and much of that was driven by lack of ADR growth.

From a macro point of view, considering SARS, 9/11 and the financial crisis of 2008, data suggests recovery starts at the point consumers feel confident that a crisis is under control. Further, stabilization and recovery in the hotel industry occurs in the subsequent four to seven months. 

William Perry contributed to this blog post.