The closing of hotels gives owners and operators an opportunity to take a critical look at their hotels and how they operate to be better prepared for business when they reopen.
The effects of COVID-19 have forced many hotel owners (and their asset managers) to make the formidable decision of whether to keep properties open or suspend operations for a period of time.
After modeling open/close scenarios, determining operational breakeven levels, evaluating carrying costs, assessing market conditions, understanding labor challenges and soliciting input from key stakeholders (e.g., asset managers, lenders, and operators, among others), many owners concluded suspending operations made the most sense. With states and cities loosening restrictions in recent months, asset managers are now guiding owners to make the equally challenging decision of when to reopen their properties. Planning a reopening must include close communication and strategizing with the hotel executive teams, along with other key stakeholders, as well as consider a wide array of factors to optimize the chance of success, particularly when travel remains limited and, in some instances, restricted.
If extensive governmental restrictions remain in place for a given market or region (e.g., 14-day mandatory quarantines) or for specific demand segments (e.g., International travel, group size), this will impact a hotel’s ability to successfully reopen. Stakeholders should look closely at the status of local demand generators that may inform the level of visitation to a given market, including museums, restaurants, beaches, amusement parks, sporting venues, universities and local offices/business parks.
Other considerations include government mandates on indoor gatherings or capacity restrictions, which will particularly impact group and convention center properties with extensive meeting space. With many states experiencing a resurgence in cases, owners need to be mindful that even a market that has loosened restrictions could re-implement restrictions at any time, further affecting demand and complicating the reopening decision.
Market performance and business on the books
Understanding which hotels are still open, where the demand in the market is coming from, whether it is COVID or non-COVID related and when other closed properties are scheduled to reopen is vital. To obtain this information, it is critical to turn to the GM and director of sales for additional market insight and information.
For most hotels, the transient/leisure booking window is now extremely short-term (24 to 48 hours prior to check-in). It is therefore critical to understand what channels should be available to obtain this short-term guest. It is equally as important to look at group business on the books to evaluate the level of risk relative to future cancellations. Hotels witnessed significant group cancellations in Q2, much of which was optimistically rebooked to Q4; however, with the number of coronavirus cases on the rise again in many markets, owners are beginning to see a second wave of cancellations for this fall.
Focus on rate integrity
It is important to be actively rate shopping competitive hotels that are open, as well as those currently closed on multiple booking platforms and leverage business intelligence tools to better understand the demand segments that are returning and the rate sensitivity of those channels and segments. The first customer segment to return has been leisure demand in suburban select-service hotels and regional resorts leading the pack.
Much of this demand has been price-sensitive, however, and is often booked through third party channels and online travel agents and likely short-term given summer vacation months. In the last downturn, many hoteliers slashed rates hoping to induce short-term demand, which proved ineffective and negatively impacted rates and recovery.
It is essential to learn from these past mistakes by prioritizing rate integrity, even at low occupancy levels, which will, in turn, lead to a more rapid rate (and profit) recovery, while also covering incremental cleaning costs and fixed expenses. With the ever-changing environment of COVID-19, properties need to re-evaluate segmentation mix and pricing strategy to optimize performance. This will take creative and careful identification of what demand exists, as well as its appropriate price point.
Don’t forget the reopening costs
When evaluating a reopening, don’t overlook the cost of personal protective equipment, including items such as plexiglass shields at the front desk, protective masks and social distancing markers in public areas. There will also be added costs associated with newly required cleaning procedures and training, particularly in housekeeping with many management companies requiring rooms to remain vacant for an extended period post-checkout prior to cleaning, in addition to new chemicals and devices such as electromagnetic sprayers for sterilizing surfaces.
Many brands/operators believed guests would opt-out of daily housekeeping, lowering costs and helping to defray new expenses associated with PPE and cleaning products. However, early indications are, to the contrary, requiring planning for additional, not net-neutral, costs. Additionally, there will be costs for hiring and training new staff, especially if previously employed staff were laid off or furloughed and decided not to return to work.
A ‘zero-based’ approach to labor
While lack of labor availability was a significant challenge facing the industry pre-COVID, hotels now have the opportunity to re-invent their staffing models. Determining what level of services will exist at each phase of opening (e.g., rooms only, adding back F&B and other guest services) will be critical to controlling labor, eliminating additional costs and lowering the operational break-even point.
Simply because a hotel reopens does not necessarily mean it makes sense to offer all prior services. Optimizing the mix of managers versus hourly staff brought back to minimize overtime on higher demand weekend nights will also yield improved productivity. Complexing positions, particularly at the management level, across other managed hotels in the market, is another opportunity to consider.
The impact of the pandemic has been devasting for the hotel industry with a full recovery likely four to five years away. With most states now reopened, there is a glimmer of light at the end of a very dark tunnel. However, with the recent increases in cases across parts of the country, many of the planned hotel reopenings will likely be delayed, and recent reopenings may need to be scaled back or even reversed. While each hotel’s reopening will play out differently with no “one size fits all” approach, the key for owners will be remaining flexible with the ability to adapt their reopening plans to evolve with the ever-changing environment.
Andrew Williamson is an associate of CHMWarnick. Contact him at firstname.lastname@example.org.
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