Ongoing government coronavirus relief efforts like the $2 trillion CARES Act and banks unwilling to take over hotels should keep most of the world's hotel supply intact through a very turbulent 2020.
A hotel’s recovery path from the coronavirus downturn in travel will hedge partially on which country the property is located.
Many hotels around the world are temporarily closed due to travel restrictions and shelter-in-place orders aimed at halting the spread of coronavirus. But countries like China are beginning to relax restrictions, and travel demand is beginning a long road to recovery. A Bernstein research report from late April estimates only 2 percent of the global hotel supply will permanently shut down due to the coronavirus crisis. Recovery is possible for the remaining supply through government assistance or lenient lenders.
“In Europe, where you see more hotels closed at the moment, it’s more the lenders and landlords that need to play ball,” Bernstein Senior Analyst Richard Clarke said. “In the U.S., to stay open and operational, it’s banked more on government support.”
As of April 27, IHG had 10 percent of its U.S. portfolio temporarily closed compared to 50 percent of its Europe, Middle East, Africa, and Asia (excluding China) portfolio closed. About 16 percent of the U.S. hotel supply had suspended operations at the end of the first quarter due to declines in revenue per room and occupancy, according to CBRE. Clarke thinks that number should be higher.
“I think the government support, especially for small business owners, is absolutely fundamental,” he added. “I think they’re only able to stay open because they’re able to pass a substantial cost on to the government.”
Hoteliers able to access funds through the Paycheck Protection Program under the $2 trillion coronavirus relief fund are in a better position to weather the downturn in travel. Branded hotels that typically need between a 30 and 40 percent occupancy rate to break even on operational costs and debt service obligations could lower the breakeven threshold to between 6 and 15 percent with PPP funds that largely cover payroll expenses, according to the Bernstein report. There are still industry calls for further government relief due to a limited number of operators being able to access the funds.
When European hoteliers reopen properties, they might need to rely on flexibility from lenders to relax payment schedules on mortgages until occupancy and revenue per room return to levels high enough to satisfy operational costs and debt service obligations. In the U.S., operators taking government funds have no choice but to keep the lights on no matter how many people are checking in.
“To qualify for PPP, you have to employ people and pay them,” CBRE Director of Research Information Services Robert Mandelbaum said. “That’s sustaining some operations that would have otherwise closed.”
A Significant (and Optimistic) Bounce Back
While PPP loans help hoteliers keep properties open in the U.S., government assistance programs elsewhere in the world still offer a boost to the travel industry.
The UK government granted retail and hospitality companies a 12-month business rates, a commercial property tax, holiday and access to about $407 million in loans. France offered some corporate income tax deferrals. Chinese cities are offering travel vouchers and subsidizing hotels to offer special room rates, according to a Horwath HTL report.
Citing STR data on 2021 supply forecasts, Bernstein estimates 2 percent of all hotels will permanently close as a result of the crisis. The figure may seem low given how the hotel industry hit single-digit occupancy rates in many markets and averaged a 2 percent loss in March — with April performance expected to fare even worse. But central government and lender assistance and flexibility around the world is expected to keep supply largely intact into recovery.
After the 2008 financial crisis, there was a net closure of around 1 percent of UK hotels, Clarke said. The group of primarily independent operators decided it wasn’t worth waiting for a recovery while bigger brands rode out the downturn. This time around, the all-encompassing drag on the economy will likely keep properties afloat since there aren’t better opportunities readily available.
“From an owner’s point of view, if there’s no good alternative use for a property, lenders will generally support them because banks in general don’t want to have to take over all these hotels,” Clarke said. “Especially when property prices are low and there are no alternative uses going around, they’ll try to support the hotelier. Even in an extreme case, the lender will take over and keep it open. It’s much more valuable as an open entity than a closed shell on the side of a highway.”
Photo credit: Government relief funds, like the $2 trillion coronavirus relief package passed in Washington, will help keep most of the world's hotel supply intact through the downturn, according to a Bernstein report. DragonImages / Adobe