EA VIEWPOINT U.S HOTELS

Extended-Stay Hotels Led the Pack in 2020,

But Will That be the Story in 2021?

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EA VIEWPOINT U.S. HOTELS

Bram Gallagher, Ph.D.

Sr. Economist

Robert Mandelbaum

Director of Research Information Services

EXECUTIVE SUMMARY:

• We expect national revenue per available room (RevPAR) to make a full

recovery to pre-COVID-19 levels by 2024.

• We expect economy hotels, based on their robust performance even as

the outbreak has intensified, to recover RevPAR by 2022. On the other

hand, upper upscale, which depends on group business, is expected to

recover by the middle of 2025.

• Operational decisions that led to enhanced revenue yield and efficient

cost controls contributed to muting declines in hotels profits.

• Going forward, brands, owners and operators will have to balance the

need to maximize operating efficiencies and profits with the desires of

guests for enhanced, or reinstated, levels of service.

EA VIEWPOINT U.S. HOTELS

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THE BAD NEWS AND THE GOOD NEWS

The end of 2020 brought the most severe surge of COVID-19 infections and deaths since the pandemic began spreading in the U.S. earlier in the year. By the end of 2020, more than 200,000 new infections were being reported per day, according to Reuters, and peaked shortly after on January 7, 2021. The terrible human toll exacted over this period can hardly be overstated, yet over this same period, our expectations for the future brightened somewhat.

Two positive stories emerged that have improved CBRE Econometric Advisors’ (CBRE EA) hotels forecasts. While news had been released about successful trials of two vaccines by November 2020, by the time of this writing nearly 167 million doses of vaccines have been administered in the U.S. already, and more than 1.9 million new doses are being administered each day, and the pace has been increasing. Combined with the demonstrated efficacy of the vaccine, three vaccines being approved for the use in the U.S., and infection rates significantly down from their holiday season highs, vaccinations have been a source of plausible optimism generally, and for the lodging industry. This is particularly the case for periods after the second half of 2021, when wide-scale vaccine distribution is not only possible but actualized.

Another source of positive news is an additional round of fiscal stimulus that took effect in January and a larger package that took effect in late March. At the time the previous forecast was made, national stimulus talks had become completely deadlocked and no new stimulus was forthcoming in our predictions. Direct assistance stimulated demand, but additional loans and extensions assist in business continuity for hoteliers as well, facilitating faster recovery.

CONSEQUENCES FOR FORECASTING

The net effect of these two conflicting updates in the industry is performance in the first half of 2021 is forecast to be somewhat weaker than previously envisioned. After, performance will pick up momentum as prospects for medium-term growth are enhanced. Figures 1 and 2 illustrate last quarter’s forecast compared to the current.

EA VIEWPOINT U.S. HOTELS

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Figure 1: Occupancy Forecast Comparison

Source: CBRE Hotels, Kalibri Labs Q4 2020.

Figure 2: ADR Forecast Comparison

Source: CBRE Hotels, Kalibri Labs Q4 2020.

Nevertheless, we still expect national revenue per available room (RevPAR) to make a full recovery to pre-COVID-19 levels by 2024. This timeline holds for many markets as well. When disaggregated, recovery times vary depending on the type of hotel and, to some extent, the market. For instance, we expect economy hotels, based on their robust performance even as the outbreak has intensified, to recover RevPAR by 2022. This chain scale includes many extended stay hotels which function as temporary residences. This type of lodging has proven to not be affected as strongly by social distancing measures

EA VIEWPOINT U.S. HOTELS

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or infection rates and may even see some additional demand from medical and other first responders. On the other hand, upper upscale, which depends on group business, is expected to recover by the middle of 2025.

Contrary to our previous forecasts, long-run occupancy is no longer expected to achieve the previous highs obtained in 2018 and 2019. These occupancies were the result of the longest sustained boom cycle in contemporary recorded lodging industry history, and most markets we track were correspondingly at or near record occupancies.

however, the pandemic will create significant headwinds for complete recovery to these previous levels. The most crucial factors include the dislocation of hospitality labor, a healthy and disciplined supply pipeline keeping pace with demand, and expanded use of remote working. The net result is a long-term national occupancy somewhat higher than the previous long-run average - excluding performance during the Global Financial Crisis (GFC) - but 1-2 percentage points lower than the all-time highs found immediately prior to the COVID-19 outbreak.

THE SUFFERING

The 2020 annual total operating revenue for the CBRE sample of over 2,000 hotels across the country declined by 57.6%. This resulted in profit declines of 78.0% at the GOP level, and losses in earnings before interest, taxes, depreciation and amortization (EBITDA) of 107.6%.

While the overall news is grim, during the year we did observe the strong efforts of U.S. hotel operators to minimize losses. Operational decisions that led to enhanced revenue yield and efficient cost controls contributed to muting declines in profits.

In general, the declines in profits occurred in a reverse linear relationship to pricing.

We believe that the introduction and wide-spread use of online travel agencies, more sophisticated revenue management and general preferences to travel permanently shifted the natural occupancy rate upwards;

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Hotels operating in the luxury and upper-upscale chain scale segments suffered the greatest falloff in EBITDA (over 100%), while midscale and economy properties saw EBITDA profits decline by a relatively limited 71.6% percent.

Because of the lack of group demand in 2020, convention hotels experienced the greatest declines in EBITDA (149.0%). Conversely, the well documented popularity of drive-to leisure destinations helped buoy the performance of the resort hotels in the CBRE sample. EBITDA for these properties declined by just 78.3%. Extended-stay hotels benefited from a base of residential guests, vacationers desiring a kitchen, and temporarily relocated medical-related demand. This helped to lessen their decline in EBITDA to 68.0%. It should also be noted that the resort hotels in the CBRE sample had a relatively high average daily rate (ADR) of $221.41, while the ADR for the extended-stay sample was $102.38.

Figure 3: Hotel EBITDA | Dollars Per Available Room: Y-o-Y Change – December YTD 2020 vs December YTD 2019

Source: CBRE Hotels Research, Same-Store Sample, Open All Twelve Months

REVENUE YIELD

During 2020 the four major revenue sources were down from 2019 on a dollar-per-available-room basis. However, when observing revenue based on a dollar-per-occupied-room basis, other operated department revenue and miscellaneous income have increased. This implies that those guests who stayed in a hotel during 2020 spent more on ancillary revenue sources such as golf, spa and retail than they did in 2019. Further, hotels benefited from collecting attrition and cancellation fees during the year.

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Figure 4: Change in Revenues| Y-o-Y Change – December YTD 2020 vs December YTD 2019

Source: CBRE Hotels Research, Same-Store Sample, Open All Twelve MonthsCOST CONTROLS

While revenues declined during 2020, so too did operating expenses. In conjunction with the 44.0% decline in occupancy for the sample and concurrent 57.6% decrease in revenue, total expenses fell by 41.6%. As expected, the greatest declines in expenses occurred in the operated departments and management fees. A significant portion of operated department expenses are variable, and thus declined because of the decrease in occupancy. Of greater importance is the fact that operated department expenses fell on a dollar-per-occupied-room basis, indicating cuts into fixed costs, and reductions in services and amenities. Management fees are mostly a function of revenue and profits, and therefore declined in a commensurate fashion.

Figure 5: Dollars Per Available Room | Y-o-Y Change - December YTD 2020 vs December YTD 2019

Source: CBRE Hotels Research, Same-Store Sample, Open All Twelve Months

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Figure 6: Dollars Per Occupied Room | Y-o-Y Change - December YTD 2020 vs December YTD 2019

Source: CBRE Hotels Research, Same-Store Sample, Open All Twelve Months

Undistributed departments are mostly fixed. Therefore, it is not surprising that the declines in these overhead costs were limited. The greatest declines were observed in the Sales and Marketing department. Franchise fees are recorded in the Sales and Marketing department and accordingly fell in proportion with the decline in rooms revenue.

Figure 7: Undistributed Expenses | Y-o-Y Change – December YTD 2020 vs December YTD 2019

Source: CBRE Hotels Research, Same-Store Sample, Open All Twelve Months

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Among the non-operating expenses, rent payments declined by 28.0% for the year. Rent payments are frequently charged as a percent of revenue. Further, the inability to generate cash flows resulted in some owners being unable to make their rent payments.Unfortunately for hotel owners, property taxes rose in 2020. We expect these taxes to be appealed in 2021 as property values decline. Insurance costs rose by a significant 14.1% in 2020 and should rise again in 2021 as a reaction to the western regional fires, and hurricanes that occurred along the Gulf and Atlantic coasts.

Figure 8: Y-o-Y Change in Non-Operating Expenses | December YTD 2020 vs December YTD 2019

Source: CBRE Hotels Research, Same-Store Sample, Open All Twelve Months

SUSTAINABLE COST CONTROLS

Looking forward, variable expenses associated with occupancy and revenue will rise as market conditions improve. The question is whether the expense savings resulting from reductions in services and amenities during 2020 can be sustained. Several of the cost controls in 2020 were the consequence of leniency in brand standards. This resulted in reduced levels of complimentary food and beverage, guest room supplies, and housekeeping.

Going forward, brands, owners and operators will have to balance the need to maximize operating efficiencies and profits with the desires of guests for enhanced, or reinstated, levels of service. As occupancy levels rise, operators will want to raise room rates. However, to justify rate increases, it can be assumed the services and amenities cut in 2020 might have to be reinstated. This will be especially challenging in the higher-priced segments that are expected to lag in recovery due to the absence of executive corporate travel and group demand. More moderate-priced hotels, with existing lower-levels of services and amenities, should find it easier to return to pre-COVID operating levels.

EA VIEWPOINT U.S. HOTELS

Disclaimer: Information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to confirm independently its accuracy and completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of CBRE.

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FOR MORE INFORMATION, PLEASE CONTACT:

Bram Gallagher, Ph.D.Sr. EconomistCBRE Econometric Advisors+1 404 504 7900Bram.Gallagher@cbre.com

Robert MandelbaumDirector of Research and Information ServicesCBRE Hotels Research+1 404 812 5187Robert.Mandelbaum@cbre.com