Since the pandemic hit, a temporary break has turned into an economic struggle for survival for many businesses. As expected, the hospitality business feels the effects of this new state of affairs with full force. In the U.S., all key performance indicators in the hotel industry, such as average daily rates, revenues per available room, and occupancy, have significantly declined. In the first week of September, American hotels had an average occupancy rate of 48%, a year-over-year decrease of 30%. To illustrate the severity of the situation, if occupancy rates were to drop by 50% in the country, that would mean a potential loss of $925 billion in business sales in 2020.
Since the crisis escalated around mid-February, analysis shows that hotels have already lost more than $46 billion in room revenue, and the Bureau of Labor Statistics reports that 4.8 million hospitality and leisure jobs have vanished. The Washington area saw a 30% decrease in leisure and hospitality employment, a figure that's greater than the national average of 24%. Hilton Worldwide Holdings, which offers a million rooms in 118 countries, reports that their second-quarter revenues per available room fell by 81% compared to the same period in 2019 and that the company suffered a net loss of $430 million. Marriot International also saw revenues plummet by 72.4% in their second-quarter report, as the company posted a net loss of $234 million. In North America, Marriott's revenue per available room saw a drop of 69% year-over-year.
Even though the numbers are frustrating, some analysts think that the worst is over, as international travel is now back, and things are returning to normal, or, to a "new normal." Most of the 5,000 hotels that shut down in March and April are now open, and occupancy numbers are slowly improving.
The Current State of the D.C. Hotel Industry
According to a report from Trepp, the leading data provider to the commercial real estate and banking markets, the hotel industry is in for a historic wave of foreclosures. However, some recent positive news for the Washington DC hospitality market, as citizenM, a boutique European-born chain, opened its first low-cost luxury lodging establishment in D.C. on August 27th. The Dutch brand announced plans for the hotel in 2017, stating that it would feature 252 rooms and 194 apartments. The company has also been actively feeling out the market, as it claims that its goal is to own up to five hotels in the D.C. area.
Fast-growing hotel development and hospitality management company, OTO Development, owns and operates 60 select-service hotels across the country, aiming to expand in Washington DC. The company, which is part of the Johnson Group, opened the Hyatt Place National Harbor in late August. A seven-story, 156-room hotel that provides on-site dining, a fitness centre, waterfront views, and a 1,900 square-foot event space.
What is encouraging is that a sizeable number of hotel projects have moved forward in recent months in the area, and those active from before 2002 are pushing through by extending their deadlines. D.C. does struggle with its real estate urban space, especially for large size projects: this includes casino resorts, which are slowly starting to rebound everywhere else in the country but not in D.C. As stated by one industry observer, "It is mostly an urban city without any real estate to place casino resorts or racetracks."
A 2019 Plasencia Group report stated that the D.C. hospitality market is desirable for many U.S. and foreign investment groups, even though commercial land is scarce. Opportunities to buy are rare. The Washington, DC Metro area, excluding Baltimore, is the sixth-largest MSA in the nation. It ranks sixth in events, ahead of cities like Dallas, Nashville, and New York, and domestic and overseas visitation grows at about 0.7%-0.8% per year.
That said, the pandemic has impacted the market hard, as in the first six months of 2020, it has seen an occupancy decline of 53%, and an average daily rate fall of almost 21%. At the start of August, 17% of rooms in the area were not available, a figure that is 6% higher than the nation's average. While already announced projects are continuing, the 2020 occurrences have stopped hotel acquisitions, as investors are shying away, and the acquisition market is at a standstill.
DC-Area Hospitality Stocks
At the start of March, stocks universally plummeted as markets saw their worse day in twelve years. Real estate investment trusts were amongst those hit hardest in the Greater Washington area. Host Hotels & Resorts and Pebblebrook Hotel Trust withdrew their first quarter and full-year revenue guidance due to declining net bookings. Pebblebrook owns 54 hotels that are home to over 13,000 rooms, while Host Hotels & Resorts owns 80 upscale hotels containing 46,500 rooms. The latter ranked 514th on the Fortune 500 list this year. At the end of February, their stocks were trading at $17.38 but now have fallen to $10.40. Pebblebrook stocks have been slashed in half during this crisis, as they went from $25 in February to $12 in September.
Some analysts are suggesting that now is an excellent time to buy Park Hotels & Resorts stock. Over the past six months, it has gained 47.33% and lost -61.62% year-on date. The current Wall Street consensus is a recommendation set at 3.30, leaning towards a Buy, making it one of the best hotel stocks in D.C., at least according to the consensus.
If we look at other hospitality industry stocks in D.C. or the Greater Washington area, we can see that Marriott International took a significant hit on account of the pandemic. It went from $150 per share in March to a low of $59 at the start of April. Right now, it's trading at about $95. Due to the company's geographic diversity, some think that the stock presents an opportunity for investors willing to wait out the storm. Hilton Worldwide Holdings stock fell from $113 in February to $56 per share in March but is recovering, and has seen a September high of $94. In June, many analysts pointed out that even though the diversified hotel chain's stock had fallen by 29% year to date, it was worth looking. The company reduced cash burn by lowering salaries, eliminating non-essential capital expenditures, and furloughing nearly two-thirds of its corporate workforce.
Choice Hotels International stock is recovering nicely, as the hospitality franchisor based in Rockville, benefits from its franchise-centric business model, which provides a stable income stream compared to peers who manage, own, or lease hotels. However, a consensus among analysts is that the stock should have a Hold rating for now.
Market Outlook and Potential Recovery
Before 2020, the hospitality and tourism industry was one of the most vital sectors in the District, supporting close to 80,000 jobs. In 2018, 23.8 million people visited D.C., a 4.4% increase over the prior year, which translated to $851 million in tax revenues. However, according to Elliott Ferguson, Destination D.C. President, international tourism in the area will not rebound to a pre-pandemic state until 2024.
Domestic visits are half of what they used to be, as going by estimates, some 11 million domestic visitors will travel to DC in 2020, compared to almost 23 million in 2019. The lack of conventions has also hurt the industry. The cancellation of such events has resulted in a loss of $422 million in economic activity. Tourism Economics says that revenue per available room should come in at $46 in the District, as compared to $172 in 2019.
STR (Smith Travel Research) estimates that by 2023, room demand will return to 2019 numbers. Nevertheless, because room rates will also return to normal, it may take until 2025 that the revenue per available room will return to what it was before this year.
Though there are fears that a second lockdown may happen, which will further cripple the industry, few believe that if such an occurrence does transpire, it will resemble the one from this past spring. Thus, experts suggest great value in Hilton Worldwide stock, as they see the company as best positioned to weather the crisis because of its quality balance-sheet and ability to generate income in this operating environment. While occupancy rates are gradually improving in the past month with increasing travel activity, hotel owners claim that the biggest challenge is to get corporate and group travel back to normal.
Working from home has been beneficial for many people, but it has been damaging to the hospitality market. The reality is that when you buy hotel stocks, you're betting that the economy will return to normal. That people will start travelling, which is unavoidable. Thus, it would help if you gave hospitality stocks in the D.C. area a consider, as this is a gateway market with multiple legs. International demand consists of foreign government representatives, associations, and people that interact with government and associations, and tourists, a more diverse client-base than most other markets.
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