After the unprecedented financial hit from the COVID-19 shutdown, hotel industry owners are cutting expenses and crossing their fingers for a slow recovery beginning in the fourth quarter.
Bay State hotels now have the green light to reopen after more than two months under shutdown order, but the drastic hit to owners’ and management companies’ balance sheets will linger throughout 2020.
“All of Massachusetts has been ugly, and what’s disconcerting is although it’s still too early to tell the impact, it doesn’t appear the business is just going to bounce back,” said Matthew Arrants, executive vice president at Boston-based hotel consultants Pinnacle Advisory Group. “Obviously the convention market is going to be dead for a while, and the hope is that the leisure segment will step up.”
Greater Boston has ranked among the nation’s four priciest hotel markets in recent years, and the local industry has historically benefited from a balanced mix of demand from business, convention and leisure travelers.
Gov. Charlie Baker ordered the industry to shut down all properties on March 31 except for ones used by people displaced by COVID-19 and those whose work was connected to the pandemic response. As hotels reawaken as part of phase two reopening, the coronavirus’ lingering economic effects, including a decline in air travel by tourists and shift away from city vacations, are expected to plague the industry for the rest of the year.
Boston hotels’ revenues per available room (RevPAR) are projected to decrease 64 percent by year end, compared with the national average of 52 percent, CBRE Hotels forecasts.
“Boston may have a bit more of a challenge in the short- to medium timeframe, especially in the upper-priced hotels,” said Mark VanStekelenburg, managing director of CBRE Hotels’ Consulting. “Boston has had fewer limited and select-service hotels in the urban core than some of the other global gateway markets, so it’s going to be taking a bit longer in the recovery.”
Urban markets are expected to feel the deepest declines in occupancy and room rates during the post-pandemic recovery, some hotel executives predict. Leisure travelers are likely to avoid air travel and city vacations in the short term, and the future of convention business which drives the group bookings market remains unclear.
Stabilization Strategies
Hotel owners are hoarding cash, cutting expenses and weighing reductions in hotel services and capital improvements to stabilize their investments.
Service Properties Trust reduced its quarterly dividend to free up $262 million this year and said that it’s prioritizing maintenance, ongoing projects and contractually obligated work in its capital spending for the remainder of 2020.
The Newton-based REIT owns 329 hotels totaling over 51,000 rooms along with 813 net-leased commercial properties, but the hotel portfolio comprises 61 percent of SPT’s rents. Across the hotel portfolio, first-quarter RevPAR declined 19.5 percent on a same-store basis.
Service Properties Trust disclosed that it’s tapped into security deposits with management companies IHG and Marriott, which operate a combined 225 of its hotels, to cover $62.4 million in shortfalls from minimum returns and rents during the first quarter. It also agreed to sell seven of its net-leased properties for a combined $59.5 million.
The shortfalls took place despite cutbacks by operators in the form of staff cutbacks, purchasing reductions and marketing budget cuts, CEO John Murray said in a conference call with analysts. The company closed 19 hotels since the end of March, primarily in the full-service urban segment which has suffered the biggest hits this year. The closures save the firm $1.9 million per month, while its select-service and extended-stay hotels are operating with limited staffing, reflecting occupancy rates below 24 percent for most of April.
‘Nobody’s Handing Back the Keys’
The firm also disclosed that it expects to exhaust all of its security deposits and most of the guarantees its operating companies have provided as soon as the second quarter ending June 30, and that it faces additional risks from its 73 properties operated by Sonesta and Wyndham, which do not include such financial protections.
The company projects a recovery in RevPAR during the fourth quarter, led by suburban extended-stay and select-service hotels.
“We expect guests may prefer smaller hotels in less densely populated suburban communities to larger urban group hotels until this health crisis is behind us,” Murray said.
His comments mirror outlook by the Federal Reserve Bank of Boston, which noted in its May Beige Book report that driving-distance leisure travel may rebound after spring vacations were canceled. The Fed study cited an 80 percent decline in hotel occupancy in Greater Boston during April, compared with 65 percent across New England.
Steve Adams
CBRE Hotels higher-priced properties will continue to suffer the worst effects, with a 51 percent loss in occupancy and 68 percent decline in RevPAR.
Despite the grim short-term outlook, there’s been little sign of hotel owners losing control of properties, amid uncertainty about valuations, Pinnacle’s Arrants said.
“Nobody is handing back the keys yet, and nobody’s expecting much to hit the market until the fall, whether it’s selling non-core assets to gain cash or to do other deals, or handing the keys back to the lender and the lender selling the asset,” he said. “There’s not clarity now, so we’re all guessing what demand is going to be like after this.”
