One of the biggest challenges the hospitality industry faced in 2020 and is facing at the start of 2021 is that many people have stopped traveling. Fewer people are staying in hotels due to fears of contracting or transmitting COVID-19. However, on the other side of the coin, COVID-19 fatigue is a real thing. People are cooped up and are looking to get out and connect with people face to face. The bottom line is people need people and hotels are a great place to connect people in a new environment.
Key Facts From 2019 on Hotels
According to CBRE Hotel Horizons, the national hotel occupancy in 2019 was 66.1 percent and was projected to dip slightly to 65.6 percent for 2020, but nothing considered major for forecasting. The 2019 hotel occupancy for Phoenix reported by the Arizona Office of Tourism ended above the national average at 68.9 percent and at 66.1 percent for the state of Arizona.
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The average daily rate reported in 2019 for the national average was $131.20, and $126.97 for Metro Phoenix, just below the national average. The state of Arizona also reported an ADR of $119.75.
Similarly, The national Revenue Per Available Room (RevPAR) in 2019 was $86.73, with Metro Phoenix and the state trailing behind at $87.52 and $79.10, respectively.
In 2019, the most significant transaction was the JW Marriott Phoenix Desert Ridge which sold in August 2019 for $605 million, or $636,842 per room.
Construction stats: In 2019, 19 new hotels were built, including the Great Wolf Lodge in Scottsdale, a 350-room resort that includes an indoor water park. The iconic Phoenician luxury hotel added an additional 645 rooms along the base of Camelback Mountain. There was also a mixture of limited service and extended stay branded hotels that were added into the room nights in 2019. There were no economy brand hotels added into the Phoenix market in 2019. Flagstaff and Tucson also added two new hotels to their supply in 2019, a La Quinta Inn and Hampton Inn, respectively.
So, what does this all mean?
Nationally, the 2019 hotel market was experiencing a positive year due to the national GDP growth and the Federal Reserve providing favorable interest rates. The economy remained robust and created demand for new hotel rooms, which created an increase in RevPAR. Phoenix especially saw this growth as it benefits from its favorable climate and active social events between January and May, such as the PGA Waste Management Open (WMO), Barrett Jackson Car Show, and MLB’s Spring Training. In 2019, the WMO had a record year of reporting 700,000 people over a 5-day period and the announcement that the NFL’s Super Bowl will be coming to Glendale, Arizona in 2023. This kind of activity in the Phoenix market spurred hotel operators and developers to begin looking at various sites and get financing in order to add rooms for the upcoming events. The social season was just beginning in Phoenix…and so was the COVID-19 pandemic.
Key Facts From 2020
All things pointed to continued better performance over the 2019 figures reported by both CBRE, Smith Travel Research, and the Arizona Office of Tourism. In March 2020, the unexpected coronavirus put a halt to all social events in Phoenix, and around the world. Nationally, the US hotel industry took a nosedive with occupancy figures dipping below 30%. As international travel restrictions tightened both domestically and internationally, and the encouragement of social distancing, room nights decreased occupancy figures by 38%, ADR dropped by 22.5%, and a decline of RevPAR by 51.9%.
Arizona Office of Tourism reported that the state ended 2020 with an average occupancy of 50 percent ADR of $109.43 and RevPAR of $54.72. Metro Phoenix reported similar year-end figures of occupancy at 50.2 percent, ADR of $102.34, and RevPAR of $51.38. This is substantially below the 2019 hotel occupancy for Phoenix reported by the Arizona Office of Tourism at 68.9 percent and at 66.1 percent for the state of Arizona.
Construction stats
In 2020, 23 new hotels were built in Arizona despite the poor hotel performance. Many of these projects were already underway and financing was already in place. The most significant hotel to be built were the two Canopy Hotels by Hilton Properties in Tempe and in Scottsdale, which both boast rooftop views. There was also a mixture of limited service, select service, and extended stay branded hotels that were added into the room nights in 2020, in other parts of the state including Tucson, Yuma, and Sedona. There were no economy brand hotels added into the room nights within Phoenix or the state.
Compared nationally, Arizona and Phoenix performed well above other markets as the stay-at-home orders were lifted in April. Business and travel were reignited in the state. Despite fluctuating case numbers of the coronavirus, hospital beds never reached capacity and businesses continued to stay open with restrictions on social distancing and the use of face masks.
This created an influx of investors to flock to the Phoenix market to get in on the action of a state that was staying open and performing well in an unprecedented time. In 2020, there were 31 sales of hotel properties in the Phoenix market. The most significant sale was the Sheraton Hotel in Downtown Phoenix which sold in January 2020 for $268 million, or $267,198 per room.
Because of the COVID-19 pandemic, hotels nationally took a dive in occupancy and ADR which heavily skewed performance numbers. To account for the declines, brokers have been underwriting sale transactions based on year-end 2019 numbers with the anticipation of the market normalizing now that a vaccine is being released and travel restrictions in closed states have been lifted. That being noted, brokers are increasing the capitalization rates by 100-200 basis points (bps) depending on location and demand drivers. Hotels in areas of heavy corporate demand have a larger increase in basis points while leisure and corporate-healthcare demand are increasing on the lower end of the basis point spectrum.
While there was activity in the market in 2020, that does not mean that all hospitality sales were for the purpose of continued use as a hotel…
So What is the solution?
What is the solution you ask? It’s a great question and there are a few things we should consider. First off, is the pandemic, at least for now, is temporary. Remember the old adage, that there is a season for everything. A time to be in a pandemic, and a time to not. We have to be very careful to not be too rash in our decision making. Think of a boat that is rightsizing. If you go too far the other direction when the boat tips over you will be back in a similar problem. Everyone should take a deep breath and give some space to reflect and chew on things that worked well and those that did not.
Secondly, we need to look forward to asking what could be a good use for Hotels? What could be a smooth transition for the use? Well for starters one could use hotels for multifamily housing. There is a huge need for affordable housing, so maybe there are some joint venture opportunities with local municipalities. Consider looking at VRBO for these units as they might be in the right area, but just didn’t have the proper target. A local developer Navin Kuber with Realty Funding Group mentioned the tremendous opportunity to transition properties into apartment communities. Furthermore, he is on the cutting edge on bringing costs down to move into the workforce housing market and even lower-income housing.
Finally, one should consider what might happen if these turned into Senior Housing homes? Could you convert a smaller room and accommodate needs? Could this possibly be an active living community?
The sky is the limit as to what we might be able to do as a development community. The only time will tell if this is a blip on the screen or a long movie that was just waiting to be played out.
For further information on this topic, please contact Arielle Litt at alitt@bbgres.com or David Kotter at dave.kotter@integrity-capital.com. David Kotter serves as principal of Integrity Capital LLC, a limited liability company and commercial mortgage brokerage based in Scottsdale, Ariz. Kotter can be reached at (480) 219-1205. Arielle N. Litt is the Managing Director at BBG, Inc. – Phoenix and a certified general real estate appraiser. BBG, Inc is one of the nation’s largest real estate due diligence firms with more than 35 offices across the country serving more than 2,700 client’s appraisal and third-party needs. Litt can be reached at 602-648-8608.
