Will vaccines and cabin fever drive a hotel industry recovery in 2021?

The pre-Covid travel and tourism industry was made up 10% of the global economy and contributed $8.9 trillion to world GDP.1 It is also one of the industries that has been hit hardest by the pandemic. In 2020, as Covid-19 shut borders, cancelled flights, beached ships, and shuttered hotels, the travel and tourism industry practically ground to a halt. By March 2021, the pandemic had cost the sector an estimated $3.3 trillion2globally. 

The hospitality sector was hit particularly hard. Not only did the pandemic practically eliminate leisure travel, business travel—which comprised the largest source of hotel revenue—was decimated as companies transferred meetings and conferences to digital environments.  In fact, the American Hotel and Lodging Association (AHLA) estimates that the impact of COVID-19 on the hospitality industry in the US has already been nine times that of the 9/11 terror attacks. AHLA’s State of the Hotel Industry 2021 report estimates that it could take until 2023 for the hotel industry employment to return to 2019 levels3.

However, the bleak picture is gradually turning around. As vaccinations are rolled out and governments slowly undo protective measures, the dismal statistics in the hotel industry are beginning to look more like an opportunity in the form of suppressed demand and growth potential. In fact, some experts estimate that consumers may soon be looking to make up for lost time by booking vacations and traveling to visit friends and family in unprecedented numbers.

Expected recovery by subsectors

The successful vaccine rollout in countries like the US and the UK has already led to signs of recovery in the hotel sector. Hotel occupancy in the US is expected to rise from the pandemic low of 24.5% in 2020 to 52.5% in 20214. Although it is still below the 2019 average of 66%, the trend is promising.  Hotels are doing their part to make travelers feel as safe as possible through initiatives such as improved sanitation and housekeeping procedures, making it mandatory for employees to wear protective equipment, providing travelers with complimentary cleaning products, and screening employee and traveler temperatures.

Yet the recovery rate is not uniform and varies between subsectors of the hotel industry. Recovery is anticipated to take place in three phases, as the different subsectors return to pre-pandemic levels at different rates: first leisure travel, followed by individual business travel, and finally group and high-volume events.

Leisure travel

Leisure travel is spearheading the recovery of the hotel industry. People have been homebound for over a year and often have not been able to see family and friends for extended periods of time. As vaccination rates rise and infection curves plummet, people are now gaining a sense of security in many countries and are anxious to get out and see their loved ones. In a surprise twist, the pandemic may even be giving a boost to hotels catering to this sector. Due to lingering Covid concerns, people may still prefer the personal space of a hotel to living in tight quarters with relatives when visiting.

General leisure travel is on the rise as well. People who were able to work remotely and maintain their income during the pandemic may now have money burning a hole in their pockets. After a year with minimal expenditures on entertainment and travel, they are looking for opportunities to utilize the extra cash.  “People still hunger for the experiences that you can only get away from home, such as culture, people, food, sights, et cetera,” says Arne Sorenson, CEO of Marriott5.

Individual and small group business travel

Individual and small group business travel is expected to be the next hotel subsector to bounce back. This includes travel for face-to-face meetings with customers and partners as well hotels for extended stays for business activity, both of which can be critical to business success.

Remote work has also opened up new opportunities for hotels as people extend their stays in attractive locations while continuing to work remotely. Sorenson has seen this trend first hand this winter. “Typically, trips to warm-weather destinations would be for one or two weeks,” he said. “But now we see people staying for one to two months.”6 If work can be done from anywhere, longer-term vacation-work hybrids may become more popular.

Group and high-volume events

Industry conferences, trade shows, and other high-volume events are expected be the last to rebound from the pandemic. There are still many restrictions on gathering sizes, and people remain hesitant to participate in high-attendance events in closed spaces even after restrictions are loosened.

However, there will likely be pent-up demand to return to conferences once it is safe to do so. Group hotels have the most to gain from mass vaccination, so as it becomes widespread, even they are expected to slowly bounce back.

Investment in the hotel industry

The hotel industry is split into two main categories of publicly-traded companies: C-corporations, and hotel real estate investment trusts (REITs). C-corp hotels generally focus on hotel management, branding and marketing, and franchise licensing. They own minimal real estate and their legal structure requires them to pay corporate taxes on dividends. Hotel REITs are companies that focus on the acquisition, ownership, and operation of hotel real estate, although some also manage the hotels they own. They must distribute 90% of their taxable income to shareholders in order to be eligible as a REIT but they are exempt from paying taxes on distributed dividends. In other words, C-corporations are the tenants, and REITs the landlords.

Both C-corporation stocks and those of REITs in the hotel industry plummeted in 2020. But by the end of the first quarter of 2021, many leading REIT stocks had risen by 30-50%, creeping back towards pre-pandemic prices. For example, as of March 19, 2021, Park Hotels and Resorts (NYSE: PK) was up 33.4% YTD, Pebblebrook Hotel Trust (NYSE: PEB) 35.4%, and Hersha Hospitality (NYSE: HT) up 47%7. As the industry revs up to go back into business, there is a window of opportunity to get into the market before the world goes on a vacation binge.

Each subsector offers different options for different investment strategies. C-Corporations and REITs that focus on leisure travel like Wyndham Hotels & Resorts could be excellent investments for investors looking to see a profit in the shorter term, as leisure travel may even be back to normal by the end of 2021. REITs that gain the majority of their profits from business travel like Marriot, may be a great investment in the long-term as their prices are still lower, but are unlikely to deliver profits in the next 2-3 years. In addition, budget and economy hotels are bouncing back more quickly than luxury hotels, so companies that have holdings in the budget sector may also offer opportunity.

No one expects hotel stocks to hit 2019 levels overnight, however, there is good reason to be optimistic about the industry’s future.

1 “The Covid-19 Pandemic Has Cost The Global Tourism Industry $935 Billion,” Duncan Madden, January 14, 2021. https://www.forbes.com/sites/duncanmadden/2021/01/14/the-covid-19-pandemic-has-cost-the-global-tourism-industry-935-billion/?sh=7852ded17d40

2 “The Future of Travel in the Covid-19 Era,” Nikki Ekstein, April 26 2021. https://www.bloomberg.com/news/storythreads/2020-05-08/the-future-of-travel-in-the-covid-era

3 “AHLA’s State of the Hotel Industry 2021” https://www.ahla.com/sites/default/files/2021_state_of_the_industry_0.pdf

4 “AHLA’s State of the Hotel Industry 2021” https://www.ahla.com/sites/default/files/2021_state_of_the_industry_0.pdf

5  “NEF Spotlight: Mapping the travel sector’s recovery” January 26, 2021 https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/nef-spotlight-mapping-the-travel-sectors-recovery

6 “NEF Spotlight: Mapping the travel sector’s recovery” January 26, 2021 https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/nef-spotlight-mapping-the-travel-sectors-recovery

7 “5 Hotel REITs to buy in 2021”, Brett Owens, March 7, 2021, https://www.forbes.com/sites/brettowens/2021/03/07/5-hotel-reits-to-buy-in-2021/?sh=33ea4fae6525