The Pandemic Effectively Shutdown the Hospitality Market

It might not be a surprise to hear that the pandemic has effectively shutdown the hospitality market, but now that we were seven months into the pandemic and the travel shutdown, the impact is clear. Since March, occupancy rates have plummeted and ADR declined in step, according to a mid-year report from Integra Realty Resources. In addition, transaction volumes fell dramatically, mimicking the lowest points of transaction volumes in the previous recession.

Occupancy rates began to fall almost immediately in late February following the mandated shutdown of travel and businesses. In March, US hotel occupancy rates fell to 39%, a 63% decreases compared to March 2019, according to the report. March was only the beginning. Occupancy rates have continued to decline in April to 24%; however, occupancy began to increase again in May and June, rising to 33% and 46% respectively.

In addition, ADR has decreased in step with occupancy, but at a slower pace. ADR decreased 16% compared to 2019 in March and another 56% in April to $73.31. However, like occupancy, rates increased in May and June to $95.37. Still, rates are significantly lower compared to 2019. In June 2019, when rates were $134.10, according to the report. Of course, the combination of declining ADR and occupancy meant a sharp decrease in RevPAR. Like ADR and occupancy, RevPAR rates bottomed out in April before beginning to increase again in May and June when RevPAR hit $44.03. By comparison, June 2019 had a $98.14 RevPAR rate.

While hotels across the board were impacted by the pandemic, some segments were more impacted than others. According to the report, full-service chain hotels saw the steepest declines in these metrics, while economy and mid-scale hotels, particularly in drive-to markets, had more demand and activity. Because this market segment tends to have lower operating costs, these hotels were better able to weather the pandemic storm.

On the transaction side, the metrics were just as dire. Transactions activity shut down almost immediately as well. In April, there were only eight hotel transactions in the US. In May, transaction volume fell again to $103 million. Those are the lowest levels in hotel transaction volumes since 2007 and a 95% year-over-year decline in transaction activity. In addition, the price per key fell to $126,873 per key. This rate is the lowest price tag since September 2014 rates, a loss of years in appreciation.

The capital markets have played a significant role in the decline in transaction activity. Many lenders will not lend on a hotel deal in the current market, and those that will are being extremely selective. A recent report from Trepp shows that 23.4% of hotel loans are delinquent by at least 30 days as of July 2020. Those numbers are significantly higher than in 2007 and 2008, during the last recession, and have largely pushed hotel deals out of the running for most lenders and capital sources.