summary
  • Room At The Inn
  • Where Will Next Month’s Rent Come From?
  • Analyzing Argentina’s Debt Settlement

Long ago, in a world far, far away, I was a frequent traveler. (Actually, it was only five months ago, but it seems like a different age.) Northern Trust has clients all over the world, and visiting with them has been my great pleasure. The quality of the conversations has always been more than ample compensation for the flight delays, missed meals and time away from family.

Among the variables associated with life on the road is lodging. In fact, the quality of hotels I have stayed in over the years has been highly variable. There have been occasional treats: getting upgraded to the presidential suite, swimming in a nice hotel pool and enjoying an amazing view. But there have been plenty of tricks, too: the eight-foot-by-eight-foot interior room with no closet, failed hot water heaters and mattresses well past their “best by” dates.

Whatever their quality, hotels are suffering amid the pandemic. Public health issues initiated their troubles, and economic issues have perpetuated them. The hospitality industry provides an instructive case study of commerce during, and after, COVID-19.

Until a vaccine is perfected, the only reliable way to prevent the spread of the coronavirus is to limit movement and increase spacing. Travel, therefore, has been deeply depressed. While there has been some modest recovery over the past few months, hotel occupancy around the world remains substantially below pre-pandemic levels.

Weekly Economic Commentary - Chart 1 - 08/21/20

This has presented a particular hardship for those who work in the hospitality industry. There are more than 700,000 hotels worldwide, which together employ 173 million people. Prior to the pandemic, more than 17 million Americans were employed in the leisure and hospitality sector. Many of these employees were at the lower end of the wage and education spectrum, which has made it difficult for them to cope with layoffs.

Even when allowed by public policy, reopening a hotel is difficult. Enhanced cleaning must be done throughout the property; temperature screening for guests is required; and hotel restaurants, often big moneymakers, may remain closed. High-rise properties have the added complication of managing crowding in elevators.

“The hotel industry is dealing with a panoply of pandemic problems.”

Consumer surveys routinely reveal that comfort with staying at a hotel will take a long time to fully recover. The risk of aerial transmission in crowded places and contact transmission from surfaces touched by carriers creates substantial trepidation. Hotels built around particular attractions like stadiums, theme parks, and casinos are struggling because attendance at those venues is either not allowed or severely limited.

One of the hotel industry’s key metrics is revenue per available room, or RevPAR. It captures the influence of both occupancy and the rates charged. On this score, the industry’s performance is the worst in history. Analysts at Bank of America do not expect RevPAR to return to 2019 levels for five years.

This spells trouble for hotel owners and their creditors. Loans to finance lodging properties are often packaged into securities and sold to investors; the prices of these securities have struggled. Delinquencies on hotel mortgages that are traded in the financial markets have risen to 18% of outstanding loans.