Hotel owners and investors in the U.S. are now in wait-and-see mode, bracing impact amid the spreading coronavirus.
Businesses and vacationers around the world have already been canceling reservations and major events have been postponed as coronavirus cases continue to grow. In the U.S., there have been 115 cases in more than a dozen states. Worldwide, over 90,000 people across over 70 countries have been infected.
KHP Capital Partners, which invests in hotels across the U.S., is reviewing its playbook if demand drops, said Mike Depatie, CEO of California-based firm.
“You could have a lot of erosion in everyday rates if this goes on for awhile, and it’s hard to get that back,” Depatie said.
If demand stays down long enough, it could take a toll on occupancy rates at his hotels. That could trigger a move Depatie said KHP Capital undertook during the financial crisis a decade ago: Staff cuts.
“Overall you try not touch guest-facing roles but if you lose a lot of occupancy, some of those things go,” he said.
A new report from Moody’s Analytics estimated the U.S. hotel industry could see a 50 percent drop in foreign visitors because of the coronavirus, and the Trump administration has already imposed travel restrictions on people entering the U.S. from certain countries.
U.S. hotels are already taking some hits to their occupancy rates, though it’s not clear if that is directly because of the coronavirus.
For the week ending Feb. 22, occupancy dropped 2.1 percent year-over-year, to 63.2 percent, according to the most recent data available from hotel research firm STR. And perhaps indicating a drop in air travel, occupancy rates at U.S. airport hotels fell 4.8 percent that week, which represented the biggest decline among the location types STR tracks.
“The obvious question is whether a dip in demand in airport hotels was directly connected to the coronavirus outbreak,” STR’s Jan Freitag said in a release late last month. “However, one week of data is not sufficient for STR to make that correlation.”
At its fourth quarter earnings call last month, Hilton reported a 1 percent drop in its revenue per available room. The hotel chain attributed the decline to “weaker-than-expected” business travel. But the company said that was a result of slowing economic growth in China, trade tensions and protests in Hong Kong.
Hilton saw its stock price drop on Tuesday, along with other big hotel chains, following the Federal Reserve’s decision to cut the benchmark interest rate amid growing coronavirus concerns.
Hilton also said that it was too early to grasp just how hard it would be hit by the coronavirus.
But based on Hilton’s experience from the SARS virus outbreak in the early 2000s, Hilton said it is expecting a further 1.5 percent hit to its RevPAR growth should the coronavirus outbreak last three to six months.
Hilton has already closed 150 of its hotels in China, where the outbreak began late last year. It also has temporarily waived cancellation fees for guests traveling to or from China, Italy, South Korea and Saudi Arabia, countries with the biggest outbreaks so far.
“The countries around the world, including China, are being quite responsible and it will be managed. It is a risk,” said Hilton’s CEO Chris Nasetta during the Feb. 11 earnings call.
But by the end of the day Tuesday, the S&P 500 had fallen 2.82 percent and the Dow Jones Industrial Average lost nearly 800 points, dropping 2.94 percent. Several major hotel real estate investment trusts, particularly susceptible to market volatility because hotel rooms can be cancelled in a day, also were in the red.
Within the hotel space, the markets that will see the most impact from the spread of the virus are those that rely on Chinese tourism, according to a report released Tuesday by Moody’s Analytics.
In 2018, 3 million Chinese tourists visited the U.S. But looking at the impact of the SARS virus on travel, the overall hotel industry in the U.S. can anticipate at least a 50 percent falloff of visitors, the report said.
Business travel pause
Businesses around the globe — like Amazon and Google — have already curtailed business travel. Listings platform Zillow also said in light of the virus, it has suspended nonessential business trips, a spokesperson said.
This pause on travel also can raise questions for hotel deals. Depatie of KHP Capital said it is difficult to underwrite the uncertainty of the impact of a global epidemic.
“Is this a temporary thing that causes major disruptions to travel patterns around the world? Who knows,” he said. But, he added, “It’s definitely entering into our discussions.”
But so far, the coronavirus does not appear to have affected hotel financing deals or hotel valuations, said Yariv Ben-Ari, a New York-based partner in the real estate group at law firm Herrick Feinstein. He represents hotel owners, operators and lenders.
The greater threat will come from the near-term impact to hotels themselves, Ben-Ari said. That will include large-event cancellations as vendors, suppliers and guests find it increasingly difficult to travel.
“People are looking to see what their rights are both on the hotel and venue side … should the virus impact the industry more closely, particularly in the U.S.,” he said.
“Force majeure” clauses — meant to cover unforeseeable events that might allow someone to exit a contract — tend to reference specific situations, Ben-Ari noted. Epidemics like the coronavirus outbreak usually aren’t covered, he said.
And while business interruption insurance can usually cover revenue losses that stem from events like hurricanes and tornadoes, sustained epidemics are also frequently left out of such policies. “Many are looking into it, but it’s not typically covered,” he said.
Among his clients, Ben-Ari said there haven’t been any instances of canceled events that have been long scheduled at hotels.
“But the real challenge is travel and coming to the U.S.,” Ben-Ari said.
EB Solomont contributed to this report.
Write to Mary Diduch at [email protected]