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National   /   April 30, 2021

Paul Bubny
By: Paul Bubny

“Stigmatized” Hotel Sector Could See Occupancy Rebound Later This Year

Calling lodging a “stigmatized” asset class after “the most challenging year on record” for hotel owners, MetLife Investment Management (MIM) sees opportunity in the sector, with occupancy recovery occurring as soon as later this year. That being said, the rising tide won’t lift all boats at the same time.

In addition to the longstanding preference consumers have been showing for experiences over goods, “the nature of this downturn suggests that those who are most likely to spend on travel will have the means to do so once vaccines are widely distributed and travel is considered safe,” according to a recent report from MIM’s William Pattison, Reginald Ross, Michael Steinberg and Austin Iglehart. “Our base case assumption is that vaccine distribution will allow for herd-immunity to be achieved in the U.S. by mid-summer.”

Individuals earning more than $70,000 per year have historically been responsible for 75% of hotel spending.5 “For this demographic, the recession effectively ended shortly after it began in April of 2020,” the report states.

“Job losses have recovered, and employment has now even surpassed pre-COVID levels. Personal savings has also increased sharply.7 This is very much different than in prior recessions, such as the Global Financial Crisis, when higher income groups contended with elevated unemployment for several years, and leisure travel was slow to recover.

“We believe the economic picture alone suggests a surge in leisure travel later in 2021, even before accounting for pent-up demand that surveys suggest has been growing over the last six months.”

For other market segments, recovery may be slower in coming. Business travel, especially group travel, may be hampered less by the still-elevated general unemployment rate than by social distancing advisories that could remain in place until next year.
“Group hotels face the additional burden of deriving a larger portion of revenues from food & beverage components, unlike limited-service hotels more commonly associated with transient travel,” according to the report. “As such, these assets may not fully recover until 2025.”

However, the pandemic also gave rise to two “self-correcting mechanisms” that help offset the headwinds facing the sector. Pre-pandemic, the hotel sector was contending with an elevated supply pipeline, with U.S. hotel stock projected to increase 13.5% between 2020 and 2025.

“Today, forecasts show the supply pipeline has moderated, and now stands at 9.2% of current stock,” the report states. “This figure also does not reflect the likelihood of a portion of hotel stock that may go offline or be converted to an alternative use such as multifamily, further constraining supply.”

Along with a moderating supply pipeline, COVID-19 has also created a new source of hotel demand in the form of the “digital nomad,” MIM says. “An acceleration in flexible working arrangements means individuals can work from anywhere and are not consigned to working in their homes. The extended duration of hotel stays during lockdown provides some early evidence of this, and we believe the trend will persist in a post-pandemic world.”

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Paul Bubny serves as Senior Content Director for Connect Commercial Real Estate, a role to which he brings 13-plus years’ experience covering the commercial real estate industry and 30-plus years in business-to-business journalism.
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