Our new blog series, The Great Acceleration, puts the spotlight on trends that have been pushed forward in commercial real estate sectors, from retail and entertainment to office, multifamily, hotels and industrial properties. To ensure that you are alerted when new articles come out, make sure to follow R.O.I. Properties on LinkedIn.
After hitting revenue records in 2019 and contributing an overall economic impact of $25 billion, the Arizona tourism market has experienced a slog in 2020. During the high season—when resort occupancies tend to run 80% or higher—the cancellation of Spring Training, spring breaks, events, and other business and leisure travel created a ripple effect throughout the hospitality industry. While hotels remained open as essential services, increased restrictions in air travel and drastically limited amenities at properties all but destroyed Greater Phoenix’s customary appeal as a warm-weather getaway.
As of late July, the Arizona Office of Tourism (AOT) calculated the industry’s net losses at about $7 billion so far, with job losses and furloughs of about 50% of the tourism workforce. Although there was a slight uptick in June occupancy, July once again fell back. AOT has created a strategic recovery plan, but the unknowns of the coronavirus pandemic will remain an issue.
What’s Driving the Great Acceleration in Hospitality?
Clearly there’s been more economic deceleration than acceleration in the overall hospitality market. Nonetheless, there are a number of areas where the advent of COVID-19 has forced a speed-up in the rate of change within hotels and resorts.
Ascension of short-term rentals. Even before the pandemic, Airbnb, Vrbo, and similar options were giving hotels a run for their money. In the early spring, it looked like short-term rentals were going to be more negatively impacted than big-brand hospitality—and indeed, a flood of properties were released on the market as owners looked at their dropping reservations. However, this segment has subsequently come back stronger. As noted in Travel+Leisure’s recent article, “Why Travelers Are Turning to Vacation Home Rentals for a Safe Getaway This Summer,” home rentals seem like a safer option than high-traffic properties and the resulting interaction with numerous unknown guests. On the downside, Airbnb recently experienced negative headlines that forced them to crack down on so-called party houses that were flouting social distancing guidelines.
Technology advances. Aside from the obvious low-tech solutions such as wearing masks, requiring temperature checks, and cleaning surfaces, the coronavirus outbreak has forced hospitality destinations to invest in high tech. Contactless check-in and keyless room entry are prime examples that are very popular with today’s travelers, for convenience as well as minimizing disease exposure. Within the rooms themselves, similar principles apply with apps that mimic smart home features, allowing guests to change the thermostat, lights, or TV channel, without ever touching a thing. In some cases, the touchless capabilities extend to restaurant ordering or reserving pool chairs.
Clearing out of marginal properties. Trepp’s July 2020 Delinquency Report notes that 23.79% of lodging properties are in default and another 5.39% are in grace (under 30 days in default)—more than 29% in default or distress. It’s too early to tell the full impact, but receiverships and bankruptcy may be in the cards for less-profitable properties with the expiration of PPP and other government funding assistance. Ultimately, we may see a trend towards alternative uses for properties that can be repurposed. Or, for more aggressive investors who can hang on, this might be an opportunity to position themselves for a value play that pays off in a 2021 or 2022 recovery.
The Phoenix commercial real estate market’s changes are not restricted to hotels and resorts—and our team is ready to help you meet the challenges. To put an expert advocate on your side for buying, selling, or leasing commercial real estate, contact R.O.I. Properties at [email protected] or 602-319-1326.