AdvisoryMatters

Hotel Outlook: Bounce back

Your hotel business has survived the pandemic, but as recovery shoots emerge, new challenges present themselves in the form of inflationary pressures and staffing shortages. As Stephen Goderski explains, these are still very challenging times for the sector.

It’s now over two years since COVID-19 hit Europe and, at least in the UK, the pandemic seems a distant memory as restrictions have been lifted and life returns to a new form of normality. Yet it was less than six months ago that the Omicron variant caused new lockdowns and restrictions in Europe, potentially threatening the fragile signs of recovery that were taking place. As Europe looks to move on with recovery post-pandemic, it faces new headwinds in the form of inflationary levels not seen for decades and in the case of the hospitality sector operationally crippling staff shortages.

Although financial support packages from the government have now ended, successful  vaccination programmes across Europe have meant that restrictions on travel have been lifted and borders opened up which bodes well for the sector as it seeks to return business to 2019 levels, pre-pandemic.  

With recovery taking shape, and largely restriction free travel and a desire from travellers to return to leisure and business trips, what can we expect for the hotel industry in the next few years?

Action during lockdown

Hotel owners and operators who were able to reduce costs to a bare minimum without allowing their properties to fall into disrepair, and who have taken the opportunity to invest will have been best placed to position for a faster return to recovery. COVID-safe cleaning protocols have become an industry standard and requirement to attract customers, and those hotels that have not embraced this will be at a disadvantage.

Businesses that have maintained good relations and regular dialogue with owners and landlords will also be well placed to move forward. In the case of leasehold properties, the pandemic led to the increasing emergence of the “hybrid lease” and a rebalancing of the landlord and tenant relationship with the general realisation that such should be more of a partnership than previously. However this still remains a small percentage of leases..

Who will your customers be?

The summer of 2021 saw unprecedented levels of domestic demand for UK coastal, resort and visitor hotspots, as international travel restrictions and uncertainty led to a ‘staycation’ boom. This demand inevitably dropped off following the summer period, but as restrictions were lifted and confidence started to return, there have been positive signs of recovery. Although generally at levels below 2019 it is a speed of recovery ahead of that previously predicted by the industry. This has been further enhanced by the opening up of borders and the slow (but steady) return of international visitors, which has benefitted London in particular.

Many have sought to protect rate, and indications are that in some locations rate is now exceeding 2019 levels, albeit with occupancy levels still lagging behind. Europe as a whole is at different stages of hotel performance recovery with those countries that lifted restrictions early, such as the UK, clearly benefitting. The increasing confidence in relation to international travel will inevitably impact the domestic staycation demand. Whilst indications are that 2022 will be another strong summer for the UK hotel industry, there may be an impact on the ‘windfall’ rates achieved in 2021 as some of that demand looks elsewhere and ‘double bookers’ cancel the domestic holiday in favour of an overseas trip. That said, the impact of rising household costs and dwindling confidence in airlines not cancelling flights, may see a retention of significant domestic demand in the UK in 2022.

Impact on business travel

Indications are that business travel may become less frequent but with longer lengths of stay. Lead-in times for bookings were already shortening pre-pandemic and this is likely to continue for the foreseeable future. However city centre hotels are starting to see business pick up with the return of international visitors, big cultural and sporting events and increasing midweek business travel. Conferences, trade shows and events are re-emerging as confidence improves, with the benefits of face to face engagement driving participation after such a long period spent online.  

Forecasting and investment

Valuers and forecasters still don’t have solid ground to stand on, with few relevant benchmarks to show a route to recovery. A year ago, most experts suggested the market would return to 2019 levels somewhere between 2023 and 2025 and in spite of examples already exceeding 2019 levels, this largely remains the view although more like 2024 than 2025. The appetite for investment in the industry remains strong and whilst the expected pricing discount didn’t really materialise due to a death of forced sales and highly competitive bid scenarios, it would appear that investors have sought yield advantage by targeting underinvested assets where there is an opportunity to add value through refurbishment, rebranding or asset management. Increasingly there is investor interest in the extended stay sector which has remained resilient through the pandemic as they could remain open when traditional hotels had to close, and consumers desire showed a preference for self-contained accommodation. The lower cost business model based on longer stays and limited staffing looks set to see this sector remain well placed to navigate the turbulent times ahead.

Prepare to adapt

Inflationary pressures exacerbated by the war in Ukraine, leading to rising operational costs and staffing shortages, will require owners and operators to be flexible in their approach. This may mean the selective opening of certain facilities, adopting technology solutions or the repurposing of areas within the hotel to engage with the local community, such as offering flexible working space to drive alternative sources of revenue. There is also increasing pressure from investors and consumers to demonstrate sustainability credentials, which presents an opportunity for hotels to position themselves as a sustainable brand or asset to stand out from the competition, albeit one that comes at a short-term cost.

So, ask yourself, how will your property compete with newer lifestyle hotels: aparthotels, serviced apartments or hotels which were renovated when demand was low? How have the profiles and needs of your guests changed and how should you structure your sales and marketing for this new environment?

What business is out there and how can you reach it most effectively? Is your hotel’s positioning and branding appropriate? Are you working with your supply chain to build in flexibility and reduce operating costs? Can your stakeholders, supply chain and partners help in the recovery? Is your product relevant, is your team motivated and have you optimised your systems? Are you putting your property and business on a pathway to Net Zero? If not, have you measure the potential risks to valuation, availability of financing and the increased in operating costs that will surely come with inaction.

Please contact our dedicated hospitality team for a free consultation for support and advice on how your business can bounce back and navigate the uncertainties ahead.  

 

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