The COVID-19 global pandemic has thrown the lodging industry into an unprecedented stoppage. Recently, as occupancies have reached all-time lows and closures are widespread, focus and interest has changed from the early pandemic question of “how bad will it get?” to “How long can it last?” The Great Recession - the most recent comparable disruption of the lodging industry - was characterized by a lengthy recovery process that produced not only the longest period of growth in hotel revenues, but also a frustratingly slow claw-back of pre-recession RevPAR levels. If there can be any positive aspect to the recent events surrounding the global pandemic, it must be that our expectations of recovery are markedly different than the experience post-Great Recession. Rather than a quick slide and protracted recovery, the experience post-COVID-19 should be an acute crash to a lower bottom in Q2 2020 followed by a relatively rapid recovery.
Our employment assumptions compared to past recessions, illustrated in Figure 1, show the shape of the economic recovery from COVID-19.
Although the trough is currently much deeper than during even the lowest depths of the Great Recession, much of this decline is caused not by underlying fundamental economic problems such as over-leveraged households, asset bubbles bursting, or collapsing financial markets, but by social distancing measures imposed to restrict or slow the spread of the virus. Once lifted, the strong underlying conditions will work to more quickly restore production. Under this scenario, employment returns to pre-COVID levels in eight to nine quarters.
The quick recovery scenario is not without substantial risk, however. Although the baseline, as usual, represents what CBRE believes to be the most likely outcome, the additional uncertainty surrounding the long-term effects of the COVID-19 pandemic means that the likelihood of the Downside scenario is significantly higher.
The Downside scenario contemplates business having difficulty resuming after a pause in operations, bankruptcies complicating the reorganization of the production chain, and, particularly in the case of hotels, demand that hesitates out of lingering fear. In this scenario, employment reaches its previous level somewhat faster than in the Great Recession, but only by about two quarters, taking 22 or 23 quarters rather than 24 or 25.
The Severe Downside scenario includes the least desirable outcome of all: a resurgence of the disease and multiple additional rounds of complete lock-down. This decline is deeper and takes longer to get out of than the Great Recession, reaching previous employment levels after 32 quarters. Although we judge the Severe Downside scenario to be much less likely than either the Baseline or Downside scenarios, it’s nonetheless a possibility given all that is still unknown about the COVID-19 pandemic.
There are some data that suggest that we are either on the cusp of the turning point or that we have just passed it. Although Horizons® tracks data at a quarterly level, high frequency data (data collected more frequently at much shorter intervals than usual economic data) can be a useful forecasting device in detecting turning points in a behavior or in general conditions.
Figures 2, 3 and 4 illustrate some of the high-frequency data that currently point to renewed interest in travel and lodging. Although it’s difficult to use these kinds of data to model the magnitude of the effect on hotels, they provide a useful indication on the direction of consumer appetite for lodging.
Figure 2 illustrates the change in number of air travelers compared to a week prior. Updated daily by the TSA, these figures point to consistent growth in air travel since April 21. International travel has been especially impacted by the pandemic and, in turn, especially impacts gateway cities such as New York, Miami and San Francisco.
Figure 3 illustrates trends for searches on Google. Here the data takes some interpretation, as the u-shape in interest in the phrase “are hotels open?” is not as straightforward as the peaked shape for the term “COVID-19.” While interest and fear of the pandemic was rising or at a high level, searches for hotels would indicate questions about closures. At about the middle of April, fear and uncertainty began to ebb, and it was widely assumed that hotels were closed. Searches for hotels after this point may be to verify that hotels remain closed in anticipation of reopening.
Figure 4 indicates requests from Apple mobility to produce sets of driving directions. While Apple users are a subset of all hotel guests, the trends across geographies is remarkably consistent. Sharp reductions in mobility occurred in March, and April saw slower but steady increases in all locations. Since the direction of driving mobility increased somewhat earlier than in air travel, it may be that domestic drive-to markets see slightly faster recovery.
Lastly, reports from hotels themselves are providing evidence that the economic recovery has begun, illustrated in Figure 5. The nadir of occupancy changes on a year-over-year basis of -83.5% occurred several weeks ago and occupancy has been on a bumpy recovery since then. Close attention to the growth of these figures over the coming weeks could provide essential clues as to a future path of recovery.
Another feature is that ADR is not seeing the same recovery as occupancy. While ADR conventionally has lagged occupancy, pricing power during the previous recovery was reduced even with record-high occupancies. An asymmetrical recovery in occupancy but not in ADR is a potential danger for industry profits. In the near-term, it seems unlikely that travelers could be lured to hotels with lower prices before key safety assurances have been made.
Many pieces of evidence point to the bottom of the COVID-19 economic crisis as having been in the middle of April and that recovery is now underway. Significant uncertainty remains, and perhaps the largest source of uncertainty is the virus. Although social distancing measures have been successful at slowing the spread, questions remain about the spread as these measures are lifted. There is no doubt that appetite for travel and hotel stays is still quite high, but assurances of safety will be paramount in attracting lodging guests, as well as navigating future social distancing directives.