As a result of the Coronavirus-Covid 19 the U.S. Hotel Industry in 2020 has suffered the greatest decline in hotel metrics ever recorded. Cash flows have plummeted and we are facing a prolonged and painful recovery with both leisure and business travel unlikely to come back until the virus is under control. There have been some signs of improvement with occupancies increasing to 39.3 percent recently from an anemic 15.0 to 20.0 percent. Luxury hotels have been hit the hardest recording an occupancy level of 33.4 percent. While economy hotels have the highest occupancy at 46.4 percent. In fact, the extended stay exterior corridor properties are currently experiencing the highest occupancy levels. The first to recover has been the drive-to leisure hotels. There has been some increase in demand from the leisure traveler. Corporate business travel has remained stymied and convention travel is non-existent.
To further complicate matters ADR has dropped by 44% compared to last year as hoteliers try to buy business from other hotels. This is a very dangerous business model. There is only so much demand in a market, and by dropping your rate you are not going to create demand by stealing business from your competitor. All that happens is you drop your rate, and your neighboring hotels drop their rates in response and the vicious cycle begins. We cannot change the demand in the local market but we can control the rate. It is very important during these times that we do not get into a rate ware. The only person that wins is the consumer.
With the decrease in occupancy and drop in ADR RevPar has declined by nearly 60 percent. Demand is forecasted to return to pre-crisis levels in the third quarter of 2022, while ADR is not expected to return to pre-crisis levels until the third quarter of 2023. This has and will create cash flow problems. Many hotel owners have been able to help their cash flow problems by obtaining a paycheck protection program loan of which the SBA has relaxed their rules.
Changes to PPP Loans (Payroll Protection Plan)
Maturity Date is now 5 years instead of 2 years
More time to use the loan proceeds 24 weeks instead of 8 weeks
Decreasing the amount of funds required to be used for payroll from 75 percent to 60 percent allowing more money to cover other business expenses
The SBA has also reopened the EIDEL Program to all businesses including hotels, not just Agriculture related businesses. Many hotel owners have been able to negotiate some type of forbearance with their lenders delaying three to six months of mortgage payments and adding those payments on to the end of the loan.
We have lots of Buyers with cash who are looking to take advantage of this dip in the market. Unless you are desperate to sell our advice is not to sell at this time. Prices have fallen by about 30 percent as a result of this pandemic. Financing is extremely difficult as Lenders don’t know when and where the market will settle. Appraisers have the same problem. “Cash is King” and those that have it know it and they are looking for bargains. If you are having trouble making your mortgage payments you need to be proactive with your lender. You need to approach them, share your concerns, be honest and propose a plan. Remember Lenders really don’t want to foreclose on your hotel they don’t know how to run a hotel. Nobody knows more about your hotel or cares more about your hotel than you. If you are having problems we are here to help as we have helped many borrowers in the past reach a workable solution with their lender. As revenues increase so do values. We are at the trough right now. All indications are that the 3rd and 4th quarters of 2020 will begin a turnaround and things will continue to improve as we move forward. If you do need to sell now, we are here to help you in various ways. We can conduct a private auction, a national public auction or a traditional method of selling.