Inhospitable Times in Hospitality

Those NO VACANCY signs could be relegated to the dustbins of history. According to new research from McKinsey & Co., the hospitality industry could be reeling from COVID-19 for years to come. In early May, occupancy was less than 15% for luxury hotels and around 40% for economy. Looking ahead, McKinsey expects economy hotels to have the fastest return to pre-pandemic levels, and luxury and upper upscale hotels to have the slowest. Due, in part, because economy hotels are better able to tap segments of demand that remain relatively healthy despite travel restrictions, including truck drivers and extended-stay guests.

In contrast, business travelers, the backbone of the hospitality industry, will be the last to hit the road again. According to McKinsey, demand will likely come back unevenly, as essential travel will differ by industry. According to executives and chief human resources officers in North America, interviewed in April 2020 across an array of industries, every one of their companies is using technology as a substitute for nonessential travel. Most expect that certain types of travel—like internal meetings—will never fully return to pre-COVID-19 levels. Companies say they plan to turn off their travel restrictions in phases, and are developing decision-making processes and more agile travel policies to account for safety before authorizing travel. Client-facing visits such as site visits and sales calls are likely to return first. Day trips and self-drive travel are likely to return earlier since physical-distancing measures, exposure, and risk will be more manageable. Conferences and industry events will likely be the last to return.

McKinsey's analysis indicates that to cover variable and semi-fixed costs, luxury hotels conservatively need occupancy rates 1.5 times greater than economy hotels. Many economy hotels can further reduce their variable and semi-fixed costs, especially if they use family labor. Many luxury hotels, on the other hand, require more than 100 employees to operate, according to the consultancy. As a result, better demand and lower operating costs suggest that economy hotels will recover faster. 

Investors are even more bearish than analysts. Mid-cap REIT share prices have fallen as much as 70% since January 1, and some small-cap funds have fared even worse. That’s driven by the structure of the REIT, a pass-through vehicle required to pay out 80-90% of its net income as shareholder dividends. 

What will get travelers back on the road and back into hotels and motels? In a word, “safety.” And if the lodging industry needs a model of safety, it should look to China, according to McKinsey. Some Chinese hotels are fine-tuning their booking tools to remind customers about the restrictions in place, and hotels follow up with guests about those before they arrive. Upon check-in, some hotels require guests to provide proof (via a QR code) that they have not been in contact with infected people. Some also measure guests’ body temperature several times: at check-in, anytime they enter and exit the hotel during their stay, as well as upon their checkout.

For their part, some Western hotels have taken steps to assure travelers that their properties place a premium on cleanliness. But are Western hotels willing to adopt Chinese standards? If so, it would require changes in government policy and public-health approaches, notes McKinsey.