To say that 2020 was unkind to the hotel industry would be an understatement. Last year, hotel occupancy rates plunged to devastating lows and revenue declined dramatically. In turn, many hospitality real estate investment trusts (REITs) lost value, leaving real estate investors reeling.
But now, things are looking up for hotels. After spending more than a year cooped up at home, people are finally looking to travel again -- and because of that, hotels are already commanding higher prices.
Room rates are up
According to the Consumer Price Index, the cost of U.S. hotel and motel accommodations rose 7.9% in June compared to May, representing the second-largest gain on record.
Hotel occupancy rates have also improved dramatically. In 2020, U.S. hotel occupancy sat at just 44% -- the lowest level on record. Last month, occupancy rates rose to slightly more than 66%, according to preliminary data from analytics firm STR. That not only is a huge uptick compared to 2020's numbers but also represents a return to pre-pandemic occupancy levels (in 2019, hotel occupancy sat at 66%).
A positive sign
While pandemic-related restrictions have largely been lifted on a national level, many travelers are still skittish about booking hotel rooms, instead opting for short-term rentals. In fact, in small cities and rural markets, short-term rentals are booming.
Still, full-service hotels have a key advantage over short-term rentals -- they offer a wider range of amenities and entertainment. Guests who book a stay at a private home won't get their beds made and towels laundered on a daily basis. So, anyone who really wants to be pampered is apt to choose a hotel over an Airbnb or VRBO property. Similarly, parents with kids to keep busy may be more drawn to hotels with swimming pools than quaint cabins in the woods.
Are hotels on the road to a full recovery?
The fact that hotel prices are up is a positive sign for investors. That said, it's a bit premature to declare that the industry as a whole has staged its recovery. While there's been a notable uptick in leisure travel, business travel has stalled, and it's unlikely to get back to pre-pandemic levels anytime soon.
This is especially true at a time when remote work is still so prevalent. After all, if employees from different parts of the country can meet easily over Zoom, it becomes a lot more difficult to justify the cost of a business trip. And given the safety risks involved (since the pandemic is not, in fact, over), it makes sense for companies to put business travel on hold for as long as they can.
At this point, many companies are only now just starting to make plans to bring staff back to the office. Chances are they'll opt to see how that goes before sending employees off to various destinations. Hotels will need business travel to really pick up to fuel their recovery, and in time, they should get there. For now, hospitality REIT investors may need to settle for small but encouraging steps.