During the depths of the COVID-19 crisis in 2020, the world’s largest traditional hotel chain, Marriott International (MAR), reported that the pandemic had “a more severe and sustained financial impact on Marriott’s business than 9/11 and the 2008 financial crisis, combined”[i]. According to metrics compiled by STR, occupancy in 2020 fell 33.3% from 2019’s level to 44%. Average daily revenue (ADR) dropped 21.3% to $103.25. Revenue per available room (RevPAR) declined 47.5% to $45.48[ii]. It’s no surprise that the American Hotel and Lodging Association (AHLA) reported that the sector has lost nearly 5 million jobs and the economic impact on the industry was “nine times greater” than the September 11 attacks[iii].  The year was just as bleak in most Asian and European markets, where we saw similar—and in some cases, more severe—impacts from COVID-19. 

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The implications for managers in the hotel space have been severe—delinquency rates of hotel commercial mortgage-backed security loans are at an all-time high, more than double the highest volume of delinquent hotel loans during the financial crisis more than decade ago.  GPs have been rattled. For full-year 2020, hotel deals were down 52% from 2019 — with 79 single-asset trades compared to 164. Total transaction volume was $5.3 billion in 2020 compared to $17.7 billion in 2019, a decline of 70%, and the average sale price per key was $273,000 in 2020 compared to $364,000 in 2019, a 25% decline. A surprisingly large number of transactions—8%—were properties that are going to be repositioned or turned into an alternative use (e.g., converted into apartments or repurposed by the government for at-risk housing)[iv].

Some properties have sold for discounts as high as 40% compared to 2019 levels, but there are far fewer transactions that many distressed managers had initially anticipated during the depths of the COVID-19 crisis. Indeed, most “stressed” hotels are not transacting at all. Many owners have worked out forbearance agreements, and the question about whether lenders will actually foreclose is very much in the air.  We believe it could be a compelling opportunity for managers who have raised significant capital geared toward distress opportunities. The good news is that COVID-19 cases are in steep decline, and there has already been a huge bounce in hotel occupancies and rates in 2021. We believe that 2021 and 2022 could be some of the best years to be a hotel owner, particularly in “drive-to” and “leisure” destinations, given that many families can attest to wanting to “get out of the house” (the definition of “pent-up” demand, as any parent can attest to).   

Look at the Long-Term Supply Fundamentals . . . And Be Critical of Hoteliers Ability to Consistently Charge Silly Rates

Since the entry of Airbnb into the hospitality industry in 2008, many have claimed that Airbnb offers a supplementary service, not a competitive service, to hotels. But there is increased evidence that it does, particularly in markets with high average revenue per available room (RevPAR) rates. And that impact varies across different segments of the industry.

Customers make comparisons, so Airbnb’s listings/offers are increasingly seen as substitutes for hotel rooms. The higher the average satisfaction score of an Airbnb property, the lower the RevPAR for hotels in the area. More specifically, every increase in the review score of an Airbnb property had a negative impact of -$25.54 on hotel RevPAR. Hotel managers therefore need to be aware of the level of service and price offered by Airbnb and other sharing platforms in their market. In the Austin market, where Airbnb has the highest supply/penetration rate, hotel revenue is negatively impacted by 8% to 10%[v].    

Obviously, Airbnb offers in a locality can no longer be ignored and should be considered when developing revenue management strategies. Hotels have long relied on popular one-time or annual events that attract big crowds like the Sundance Film Festival, Kentucky Derby and Lollapalooza to get some of their highest room rates of the year. The industry buzzword for this is “compression nights,” and they have long served as opportunities for hoteliers to achieve peak pricing.  But this is changing—during the pope’s visit to New York city in 2014, as one example, Airbnb increased the lodging supply by 17%[vi]! Nothing crimps a hoteliers’ buzz during Coachella more than a tsunami of pop-up rooms that saps their pricing power. In hotel-speak, the inability to raise prices diminishes a hotel’s “value capture.”

Airbnb is doing more than offering a “local, cultural, immersive experience,” for folks willing to sleep on some stranger’s floor in downtown San Francisco. The threat of entry and growth of Airbnb used to be directly felt by low-end hotels and traditional B&Bs because private room prices are generally on par with offerings of 1- and 2-star hotels. Hotels catering to business travelers and upper-scale hotels were less affected.

Not so anymore. In a bid to attract work-related travel, Airbnb is now actively collaborating with convention bureaus, conference hosts, and state governments. Airbnb has partnered with Delta Airlines (DAL), so airlines guests can earn miles by booking Airbnb properties through the airline’s website and piloted Airbnb Corporate Travel targeting business travel managers by offering properties with business amenities.

The next best thing to doubling, tripling, and even quadrupling room rates during the Super Bowl (or when an unprecedented weather event hits Texas) is gouging mid-week business travelers in tight supply markets. This has been a good steady business. However, today Airbnb has more room inventory than the largest hotel players, and it has been adding more luxury offerings on the platform.

Every time Airbnb’s supply doubles – which is its average yearly pace since inception – hotel revenues fall 2%[i].

Can Hotels “Disrupt” the Disruptor?  Sure . . . But at What Price?

Airbnb’s—along with VRBO and a host of competitors’—secret sauce is the digital booking system, allowing consumers to easily compare a wide variety of options. Hotels looking to compete need to provide an equally impressive mobile-centric experience. All the fast-growing peer-to-peer lodging sites and online travel agencies allow guests to check-in without going to the front/reception desk. Some even sync with business expense apps.

Two-thirds of the services provided via Airbnb’s app do not relate to the booking itself but rather to the stay and experience of the guests who not only book a space but also concerts, cooking and fitness classes and other experiences[ii]. How hard is that? Hilton and Intercontinental are probably up to the challenge of coming up with audio walks and food scene recommendations. Harder to replicate is the fact that people want to book interesting and engaging places and most hotels offer generic spaces. Today, in addition to inflatable mattresses, Airbnb (ABNB) offers designer homes, private islands, and everything in between, including treehouses, castles, and boats.

Small urban units are Airbnb’s real game, and new models like Yotel, Moxy, and Tru Hotel are imitating the upstart by ditching the opulent lobbies and offering limited-service and minimalist micro rooms with less closet space and no desks. Some even offer dual and king-size bunk beds – something that was unthinkable in the hotel industry ten years ago. You want dense? You want affordable? This is where hotels can deliver—but the consistent ability to charge higher rates (getting that “value capture”) at times of significant demand might be challenged longer term.

[i] Marriott International, Statement on Marriott International’s COVID-19 Update to Associates, May 2020

[ii] Business Travel News, STR: 2020 Worst Year on Record for U.S. Hotels, Jan 2021

[iii] American Hotel & Lodging Association, AHLA’s State Of The Hotel Industry 2021

[iv] CoStar, Hotel Deals Pace To Pick Up After 2020 Volume ‘Fell off the Cliff’, Feb 2021

[v] Airbnb's effect on hotel sales growth, International Journal of Hospitality Management. Blal, I., Singal, M., & Tempal, J. (2018)

[vi] The Wall Street Journal, Airbnb Crimps Hotels’ Power on Pricing, Sep 2015

[vii] The Conversation, As Airbnb grows, this is exactly how much it’s bringing down hotel prices and occupancy, May 2019

[viii] Harvard Real Estate Review, A New Era of Lodging: Airbnb’s Impact on Hotels, Travelers, and Cities, Jan 2019