2020 has been a horrendous year for hotels. Ever since the coronavirus outbreak took hold in March, demand for hotels has waned as travelers have cut back on plans and hunkered down at home instead. It's estimated hotels as a whole have seen a 50% decline in revenue, resulting in $124 billion in losses.
In fact, 2020 is on track to be the worst year on record for the hotel industry, with 80% of rooms staying unoccupied. But while hotels are clearly struggling, some hotels may be faring slightly better. Specifically, extended-stay hotels, though still losing money, may be not taking the same financial hit regular hotels have been subject to since the pandemic turned the travel industry upside down.
Why are extended-stay hotels struggling less?
Extended-stay hotels cater to a different clientele than regular hotels. They don't rely on leisure travelers so much as business travelers or those looking to bridge a gap between rentals, so they serve a very distinct need.
Some people use extended-stay establishments as their homes for months on end, holing up in these hotels rather than dealing with the complexities of signing a lease on an apartment. And while demand for extended stays hasn't been what it was before the pandemic started, it does continue to exist.
In fact, Extended Stay America (NASDAQ: STAY) reported an $8.8 million second-quarter loss this year, which pales in comparison to what larger hotel chains have lost. Why the limited hit? Extended Stay America opted to shift gears and focus on attracting travelers who book long-term stays -- those lasting a month or longer. And those efforts have paid off, with occupancy rates holding well above industry averages.
Case in point: Extended Stay America reported an occupancy rate of close to 70% during 2020's second quarter. And while it did have to offer heavily discounted rates to drive occupancy up -- hence the loss it took -- it still didn't suffer the same catastrophic losses as other hotel chains.
So hotels across the board may want to consider shifting gears and catering to longer-term travelers. But whether they'll be in a position to offer substantial-enough discounts to attract longer stays is another story.
Should hotel investors breathe a sigh of relief?
The fact extended-stay hotels may be seeing higher demand and fewer losses is good news for investors, but it may not be enough to negate the hit most hotel chains are taking. All told, now isn't a good time to be invested in hotel REITs, or real estate investment trusts. And while holiday travel may infuse some added revenue into hotels, we can bet occupancy rates will fall well short of standard seasonal projections.
Furthermore, if the coronavirus outbreak gets exponentially worse -- there's already been a major surge in cases going into the second half of October -- business travel may decline further, which could be a direct hit to extended-stay establishments.
As such, investors will have to hope hotels manage to take in just enough revenue to stay afloat until the pandemic concludes. At that point, there's apt to be an uptick in demand as restless travelers pack their bags and businesses resume conferences and meetings -- but hotels need to stay alive long enough to get there.