Analysis of “ramp-up” data from past recessions and hotel reopenings in China post-COVID-19 might provide insights into the recovery for the U.S. hotel industry.
BROOMFIELD, Colorado—Owners, developers and investors are interested to know how long it takes a new-build or freshly renovated property to “ramp up” to what’s considered normal performance.
The COVID-19 pandemic has caused some hotels to close across the globe, and thus forecasters are looking at a different type of ramp-up period.
In “Ramping up after a downturn,” part of the Hotel Data Conference’s webinar series, Hannah Smith, senior consultant of STR’s Consulting and Analytics division, discussed how Chinese hotel markets showed signs of improvement in the months after China first contained COVID-19 and how historically new hotel openings fared in the U.S. hotel industry following the Great Recession.
Trends in China
STR studied hotels in Shanghai that were temporarily closed in January and February due to the pandemic. As hotels began to reopen in March, they slowly increased their occupancy index against their comp set, approaching 2019 levels by May and June, but there wasn’t as clear of a ramp-up in average daily rate index in 2020, Smith said.
“When we look at the (2020) ADR data, there’s basically no difference in index to (2019); it’s within just a couple points of each other,” Smith said. “There really is no clear ramp-up; these hotels were opening up at a normal relative ADR to their competitors.”
Smith added that April 2020 stands out as “a bit of an outlier” for a couple of reasons.
“One is that the operators of hotels that were previously closed are still testing the waters, still trying to find where exactly the normal ADR now is in COVID times,” she said. “Another factor could be the competitors’ hotels that stayed open in January and February could have stayed open by taking lower-ADR contract business, whether that’s government business (or) other relief effort-related business. It could be that is bringing down the competitor’s ADR for April, but then that’s starting to fizzle out in May and June.”
“Absolute performance is still at near record lows” in terms of occupancy, ADR and revenue per available room, Smith said.
“These subject properties were running a 13% occupancy in March. That was only up to 45% in June, where normally these properties would be running in the mid-70s in terms of occupancy at this point in time,” she said.
China’s drive-to markets also experienced a quicker ramp-up of leisure demand, while hotels relying on group, international or business transient demand are taking a bit longer, Smith said. She added that for now the absolute numbers appear steady in the drive-to markets.
“These are the markets that are doing the best right now in terms of absolute performance as well,” Smith said. “They're running about a 50% occupancy in May and June, versus around 62% last year.”
Past recession performance in the US
Patterns in the data for ramp-ups of new-builds in the U.S. following the Great Recession showed that generally occupancy ramps up first during an upcycle, followed by ADR and then RevPAR, which could take up to two years.
From 2007 to 2009, ADR was the first metric to ramp up for business and international markets (Boston, Chicago, Dallas and New York); fly-to leisure markets (Hawaii and Anaheim/Santa Ana, California); and drive-to markets (Colorado, Florida, Carolinas, etc.)
Smith warned it’s too early to predict whether the industry will see similar performance trends this time around.
“The ADR growth landscape was very different in the previous recession versus the one that we’re headed into right now,” she said. “Back in 2007, the (U.S.) top 25 markets were growing ADR at 7.5%, and another 3% in 2008. For context, the top 25 markets have not seen over 3% ADR growth since 2015. So we’re entering a recession with already anemic ADR growth, which is certainly being hurt now by the loss of demand.
“It’ll be interesting to see whether this ADR trend holds in all recessionary periods, or if this is just unique to what we were seeing back in 2007 and 2008.”
Lastly, new U.S. full-service hotels were also slower to ramp up, with RevPAR averaging 14 months and occupancy more than two-and-a-half years to return to normal levels. Limited-service hotels achieved RevPAR ramp-up two months earlier and occupancy ramp-up about a year ahead.
Full-service hotels’ ADR “ramped up pretty much immediately, but (recorded) almost a three-year occupancy ramp-up, which is a long time to wait for those full-service (brands),” Smith said. “Three years is a long time to wait for those properties to fully achieve the same occupancy as their competitors, and contrast that with limited service, which had a much quicker ramp-up time.”