China’s Choppy Hotel Recovery Sounds Warning Alarm for Global Developers

Most of the major hotel companies spent third quarter earnings calls focusing on strong recoveries underway in the U.S. and Europe. 

China, the industry’s go-to growth story for much of the pandemic, faced a significant setback over the latter part of summer due to the Delta variant and the country’s zero tolerance approach to new cases. Even Europe, which has lagged in its hotel recovery due to various lockdown measures across individual European Union member countries, outperformed China’s hotel industry for the last two week, according to STR.

Most of the major companies, from IHG to MGM Resorts and Las Vegas Sands, all maintain the long-term development climate in China is strong despite the recent performance flounder.

That’s a significant take, especially for the casino resort companies that saw their valuations tank earlier in the fall upon news China was pursuing heightened regulations on top of license renewals in the special administrative region and gaming destination of Macau.

But not everyone is looking at the China travel climate with rose-colored glasses. 

“We need the Chinese to travel again,” Accor CEO Sebastien Bazin said last week at the NYU International Hospitality Industry Investment Conference. “We need them back.”

Many hotel companies in recent months tried to unbundle demand trends with development, noting any drops in demand were short-term issues while real estate was a long-term play. IHG CEO Keith Barr told Skift last week the “long-term viability of China is there.”

There is no denying that China absolutely needs hotel rooms and is fertile soil for the major companies to swoop in and start branding projects within national borders.

But Bazin’s comments allude to the potential long-term impact of China’s closed borders remaining so for an uncertain length of time. If so, that begins to weigh heavy on how projects pencil out in the international destinations that normally bank on Chinese travelers to fill airplane seats and hotel rooms. 

“It is not a good piece of news for the rest of the world, the fact that China remains closed,” Jean-Jacques Morin, Accor’s deputy CEO, said in an interview with Skift last week.

The Need for the Outbound Traveler: China was an enormous source of growth for the global travel industry prior to the pandemic and became the world’s largest outbound tourism market in 2013, according to Skift research. A pre-pandemic study of outbound travel trends from China estimated as many as 286 million trips abroad would come from the country by 2029. 

But the pandemic drastically altered those trajectories. The country remains largely closed off for international travelers. Even opening a travel lane between the special administrative region of Hong Kong and Mainland China has been a contentious process, with signs pointing to some degree of access starting next month on a limited basis. 

A lot of attention in recent months concentrated on what China’s choppy recovery meant for its own domestic tourism business. But there are clearly international implications to the country’s closed off borders. 

Asia, Europe, and North America are three of the top destinations for outbound Chinese travelers, according to a Dragon Trail consumer sentiment report. While the immediate impact of a void in such travelers would be felt at hotels in some of the world’s largest cities — typically where international travelers visit — there are development implications. 

It’s not uncommon for hotels in markets like New York City to bank on as much as a quarter of their business to come from international travelers. If a significant portion of that goes away, new projects in these cities won’t pencil out unless operators can shift their business strategy to suddenly start catering more to domestic travelers. 

“A very large part of the travelers in Southeast Asia are Chinese. People that go out of town on vacation, the people that go to Australia for studies or for business or for vacation are Chinese. I’m guessing [they account for] 25 percent of the flow,” Morin said. “They are affluent travelers basically filling up the rest of the world.”

Continue to Build: While there may have been a brief flash of concern for China’s domestic hotel development outlook earlier this year when property developer Evergrande teetered on the edge of default, hotel executives remain bullish on their respective portfolio growth trajectories there. 

“We had multiple conversations of what does this mean for us and is this a contagion,” Barr said. “Today, it doesn’t seem to. In fact, I think it might create a buying opportunity for the strongest companies with the right balance sheets, as some of the over-leveraged companies have to effectively sell assets to basically generate cash.”

China’s hotel development pipeline, with more than 660,000 rooms, is up 2 percent from last year, according to Lodging Econometrics. Hilton, IHG, and Marriott have the largest shares of the pipeline. 

But a comment to keep in mind comes from the casino sector. Las Vegas Sands made plans earlier this year to sell its Venetian Resort Las Vegas and the Sands Expo and Convention Center for $6.25 billion. 

The plan was to vacate the company’s namesake city in favor of chasing opportunities in Asian markets like Macau and Singapore. But Macau has had its own choppy recovery thanks to travel restrictions from Mainland China as well as more recent obstacles like the threat of increased gaming regulations and license renewals. 

Las Vegas Sands executives were extraordinarily optimistic on their most recent earnings call about their outlook on continuing to do business in Macau and with Chinese regulators. But they acquiesced about the possibility of there being a longer-than-expected damper on outbound Chinese travelers. 

Company leaders maintained they can still make $1.5 billion at their Marina Bay Sands resort in Singapore from travelers from other Asian markets like Japan, South Korea, and Malaysia.

“Obviously, part of our business is dependent upon access to the Chinese market, but it’s not [entirely] dependent,” Las Vegas Sands CEO Robert Goldstein told analysts on an investor call last month.

Pandemic Alters Future Hotel Management Operations

Hotel asset managers will play even more of an outsized role in navigating the industry recovery, according to a JLL report out today. The hotel industry’s cratered performance during the pandemic tanked performance levels and ate into profit margins. The fact hotel owners largely kept rates intact instead of discounting to shore up demand is a significant life raft that should enable the industry to recovery much faster than in prior downturns. 

“[Average daily rate] decreases have not been as high as we thought they were going to be. At a premium and luxury level, we are seeing very little pricing resistance from demand patterns. That’s a phenomenal indicator,” Andrea Grigg, JLL’s global head of asset management for hotels, told Skift in an interview ahead of the report’s release. “Because if [rates] hit bottom, the recovery would have been so much longer.”

Asset managers aren’t resting on their laurels with good news that rate integrity will fuel a faster recovery, though.

The pandemic was a lesson for many portfolio owners to not focus on just one type of geography. Major cities continue to struggle more than resort and leisure destinations when it comes to hotel occupancies, especially during the week. 

“Resort and predominantly leisure-dominated markets in the past have been the more volatile and riskier. We’re now seeing investors realize how important is to have a diverse portfolio and how resort and leisure destinations have been very resilient,” Grigg said. “That will be a shift that is here to stay.”

Leaner Operations: Hotel companies and individual property owners shed staff early in the pandemic because of record-low demand levels. But bringing those workers back hasn’t been easy. The overall hospitality sector faces a labor shortage crisis, with U.S. Bureau of Labor Statistics estimating the leisure and hospitality sector is still down 1.4 million jobs since before the pandemic.

Keep in mind that the hotel industry was already struggling with a staff shortage issue prior to the health crisis.

Hotel owners had to make do with less staff while demand levels soared over the summer. The industry is now beginning to accept the harsh reality many of the workers lost during the pandemic are likely gone forever, putting even more of a need to innovate with technology and adjust operations to work with even more limited staffing levels than before the pandemic. 

“There is an expectation that we’re going to come out of this a leaner and meaner industry,” Grigg said.

Many hotel company CEOs in recent weeks touted efficiencies garnered through the pandemic, most visible by limiting daily housekeeping at hotels to only the most luxurious brands while rolling out a by-request-only service at more affordable brands. 

Exactly how much efficiency will come from these job cuts and standard reductions? Nobody is ready to say.

There wasn’t a specific number provided on earnings calls, and none of the hotel executives Skift interviewed over the last week at the NYU International Hospitality Industry Investment Conference were willing to go public with a projection. 

“How much leaner and how much meaner? I think you’re going to have a hard time finding someone who will put a number to it,” Grigg said. “There is no doubt it will be a more efficient industry. But there are a couple of uncertainties out there that will make us a little bit more hesitant to put in a number to it.”