By Meghan Hall
The hospitality sector has been hit noticeably hard by the pandemic, and all aspects of the industry came to a screeching halt in 2020. The disruption caused by COVID-19 has hospitality developers, operators and lenders alike strongly weighing the pros and cons of the market. Many projects in the hospitality pipeline may never come to fruition, according to a new report released by Irvine, Calif.-based Atlas Hospitality Group, and the sector’s complete recovery could take between three to four years.
“When it comes to the number of projects in planning, we’ve seen a huge spike in those deals either being deferred or abandoned all together,” explained Alan Reay, president of Atlas Hospitality Group. “…[And] I think those that are deferred, the vast majority of those projects will be tagged as abandoned. The majority of those developers are looking at alternative uses.”
Reay noted that more than half of hotel projects in planning have been deferred. Across California, there was also a 28.2 percent decline in the number of hotels opened. However, part of the decrease is not just due to projects in planning that have been postponed or scrapped, but projects actively in construction. Many of those who have already began built out are either delaying openings all together—meaning they aren’t labeled as completed—or development teams are slowing down the pace of construction.
“It is true that the longer you delay construction, that you’re carrying the interest costs with everything else,” noted Reay when asked about how slowing construction could impact developers’ bottom line. “I think many developers did a cost-reward analysis and found that if they didn’t stop completely, but if they could just slow it down a little bit, that was fine with them.”
California currently has 168 hotels and 23,451 rooms under construction, versus 1,245 hotels and 165,685 rooms in planning. In Northern California, 27 hotels made it to the construction finish line. Combined, they include more than 2,700 rooms. The vast majority of hotels opened in Alameda, Kern and Sonoma Counties. San Francisco County did not see any hotel openings in 2020, although five hotels totaling 528 rooms are under construction. In Sacramento County, two hotels with 227 rooms opened last year, a 34.4 percent room count decrease. Santa Clara saw four hotels and 403 rooms open, a 79 percent room count decrease.
Both the level of hotel construction and the greater hospitality industry have a long road of recovery ahead. Across California, REVPAR declined by 50 percent and occupancy rates sat at 49 percent, slightly higher than the national occupancy rate of 44 percent. With fundamentals far lower than 2019, funding new projects has become increasingly difficult.
“Quite honestly, construction financing for hotels has dried up,” said Reay. “I don’t see that changing for at least the next few years.”
Many hotels—especially those in urban cores—are heavily dependent on weekly business traffic from convention centers and companies. Markets like San Francisco and San Jose have been classified as some of the hardest hit in the state. Those markets also usually see a lot of international travel, another source of revenue that has practically dried up.
Developers and property owners are now pivoting away from hospitality to product types that can remain more stable in the long run, especially multifamily.
“A lot of developers are looking at alternative uses, and a very high percentage is looking at residential, either multifamily or condos,” noted Reay. “The reason for that is that because both retail and office have taken a beating during this pandemic, and they’re probably second and third in terms of depressed values to just the hotel market.”
While Reay expects a surge in leisure travel as vaccinations are widely distributed and the coronavirus is better controlled, the future of the office and work from home strategies will remain a long-term challenge for hospitality.
“We’re finding it interesting that in Silicon Valley, there are a lot of companies moving out of the city and a high percentage of people working from home,” said Reay. “We have a vaccination, but questions are going to remain that even when the pandemic flips, if business is going to remain the same.”
If companies decide to shed office space—a strategy which Reay has seen considered by many in the industry—hospitality will need to adjust to make up for lost revenue.
“That is not good for the urban core, and that is not good for downtown hotels,” added Reay.
Reay compared COVID-19’s disruption to the hospitality market to Amazon’s disruption of traditional brick and mortar retail. The industry will need to adjust and incorporate new strategies in order to remain viable in the long term. While some developers are switching product types, others are focusing on health and wellness amenities to draw additional business. Reay acknowledges the industry will need to evolve.
“Things have changed over the years; even before me, it was the three martini lunch people would talk about,” said Reay. “We have to be able to maneuver and work with it. Just as we’ve seen in the past, it is just a function of our business. We modify and change.”