Hotel ADR stable but occupancy lagging

A former C-level executive at InterContinental Hotels Group (IHG) plc emphasised that the industry has been “completely hammered” in an unprecedented way. “In 2009, I think the European RevPAR was down something like 15% and maybe in the worst quarter, 25%,” they said. “I think in 2020 or… the four quarters following COVID… the industry has been down more like 80-85%, so there’s no comparison and nobody has done well in that space.”

Since travel restrictions have eased, the overall picture has been improving across the UK, with occupancy levels at 71% in October, which a former VP at IHG described as “quite a positive figure”. This has been driven by economy and mid-scale hotels, with luxury occupancy still only at 28%. The luxury market, which relies heavily on international tourists, particularly from the US, has suffered the most from travel restrictions. The former IHG executive noted that luxury rates also tend to drop more at the start of a crisis or recession compared with economy rates – but that they rise more, proportionately, as recovery gets underway. Overall, London, with 65% occupancy in October, is improving but still lagging behind provincial areas. 

Even if occupancy was back to pre-pandemic levels, labour shortages are weighing heavy on the industry. COVID-19 and Brexit are largely to blame, we heard, with an expert referring to a statistic that “72% of all the staff in the luxury hotel sector in operations are not British”. Demographics is also an issue with some experts highlighting some trends: “Labour market tightness is a feature across the western Europe markets that I operate in, and it’s all the same factors,” they said. “It’s people leaving the workforce, particularly [the] over 50s. It’s people leaving the hospitality sector and finding other opportunities…” 

With COVID-19 exacerbating these issues, labour is becoming scarcer and more expensive – a “sudden” reversal from a year ago when it was “the best time in the history of the industry to recruit because there were so many people unemployed or fearful for their jobs”. 

More positively, Interviews suggest the industry is beginning to see some “overdue” efficiencies in back-office areas such as finance and accounting, while technology is transforming customer experiences with self-service check-in and QR ordering. “I think we’re going to see a lot more multi-tasking team members who are covering reception, bar and restaurant, depending on the physical layout of the hotel, so I think there’ll be a lot more efficiency in certainly the bigger full-service hotels than has been the case in the past,” a specialist said. “That’s not a bad thing for the industry and not a bad thing for guests, but it’s being forced upon the industry in terms of managing through this crisis and managing through the aftermath in terms of labour costs.”

Meanwhile, average daily rates (ADR) across the industry are stable, with it being noted that guests don’t appear to be cost cutting during their stays. As long as hotels don’t get into “rate wars”, we are hearing confidence that ADRs will remain stable. “I think on the flip side, occupancy will still be the biggest problem for a hotel and any damage to RevPar will [be] from occupancy, not ADR.” 

Experts have also been optimistic about asset prices, saying that they have held steady throughout COVID-19. “The prices are not that different to what they would have been and it almost ignores the fact that there are going to be another 18 months of gradual recovery from this.” However, they acknowledged that the end of government support could create more distress in the market. “There may be a bit more distress coming into the new year than there has been, so the supply side in terms of hotel sales may increase, but at the same time, there’s such a strong demand side that I wouldn’t necessarily bet at this point that we’re going to see any kind of material change in asset prices.”