The Great Return: the revival of urban markets

Many parallels have been drawn between COVID-19 and the prior two economic crises (The Great Financial Crisis or GFC and 9/11) with respect to their impacts on the lodging industry. While hotel demand was severely impacted during all three, the way in which the industry rebounded was vastly different.

Contributed by Zach Demuth, head of Americas Hotels Research, JLL Hotels & Hospitality Group

The GFC and 9/11 disproportionately impacted resort markets as discretionary income plummeted and travelers were generally hesitant to travel far from home. The impact from COVID and its subsequent recovery has been quite the opposite: resorts were the first markets to recover, while urban markets have been slower to bounce back. This has begun to change though as cities are starting to reemerge and experience a revival.

In the months following the GFC and 9/11, cities were the first markets to recover. Due to economic depression and fear of flying stemming from the GFC and 9/11, respectively, travel was generally restricted to essential trips. This predominantly benefited urban markets as they generate a majority of hotel demand from corporate (individuals and groups) travel. Resort markets, on the other hand, suffered. Fast forward to today and the recovery following COVID has looked different.

On an April 2022 TTM-basis, RevPAR in resort markets was 112% recovered relative to 2019 levels; whereas RevPAR in city/urban markets was only 72% recovered. Unlike in the two previous crises when personal savings cratered, U.S. savings is currently at an all-time high stemming from COVID’s restraint on discretionary spending due to widespread lockdowns. That, combined with increased hybrid work opportunities, has resulted in an explosion of leisure travel which has largely benefited resort markets. Additionally, many cities implemented increased restrictions which limited hotel demand drivers and often drove travelers to remote areas with open spaces and limited human interaction.

Improved urban performance

The loosening of COVID-related restrictions stemming from a rise in vaccinations has resulted in many workers returning to the office and the reemergence of cities. Through April 2022, TTM-RevPAR in urban markets has grown more than any other market-type in the U.S., with an increase of 161% from its February 2021 pandemic trough. As a comparison, TTM-RevPAR in the U.S. overall has grown 108%.

While corporate travel is still in the early phase of recovery, cities are starting to see the return of small conventions which is helping to drive hotel occupancy and generate more consistent business levels. For example, New Orleans hosted a medical convention in April which attracted nearly 20,000 attendees, making it one of the largest conventions the city has hosted since the onset of COVID. While large conventions remain limited, the city expects overall convention center occupancy to recover to 90% of 2019 levels by the end of 2022. As one of the largest convention center markets in the country, this recovery is a welcome sight and one that other cities are also starting to see.

Cities are also observing a resurgence in leisure demand as tourist attractions reopen. Following nearly two years of capacity restrictions and postponements, concerts, sporting events, theater and other live entertainment are seeing record attendance. In fact, sales for future concerts reached US$173 million in Q4 2021, a record-high and a growth of 19% relative to the same period in 2019.

Cities are the primary beneficiaries of these events and, as such, are seeing an influx of travelers. As occupancy grows, hotels have been able to regain pricing power which should help to bolster profitability. Given that many urban hotels have been operating in a zero or negative cash-flow environment since the onset of COVID, a return to normalized profit-levels is extremely important and will help to fuel investment activity.

Accelerating urban hotel liquidity

The improvement in urban hotel performance has translated to a renewed investor optimism in these markets. Prior to COVID, urban markets accounted for an average of 44% of total U.S. hotel liquidity on an annual basis (2000 – 2019). In 2021, this dropped to 35%. Not only have urban markets historically driven the highest portion of hotel liquidity in the U.S., but they also have often generated the highest pricing relative to other markets due to their consistent profit levels, underpinned by limited seasonality and resulting stabilized occupancies.

Following the shock to demand and its impact on profitability, urban market average price per key hit nearly an all-time low in 2021. With a murky timeline for recovery and many hotels operating at a profit loss, investors of urban hotels sought to divest underperforming assets to generate at least some cash flow and limit further loss.

As urban hotel performance has improved so too has investor sentiment. Through the first four months of 2022, urban markets have accounted for US$2.9 billion of liquidity, a decline of only 1% relative to the same period in 2019 and the third-highest total volume in the past decade. Perhaps more importantly, though, pricing has begun to normalize with average price per key reaching US$243,000, a decrease of only 19% relative to 2019.

Cities like Boston, Nashville and New York have seen record-levels of hotel liquidity driven by the sale of high-profile assets such the W Hotel Nashville which sold for US$950,000 per key, the highest pricing ever for a hotel in Nashville. With record-levels of dry powder on hand, expect hotel sales in urban markets to accelerate further throughout 2022 and beyond.

The Great Return has only just begun 

While urban hotel performance is accelerating, bringing with it an influx of capital, there is still a long way to go. Not all cities have seen the same level of recovery, particularly those that rely heavily on international demand.

While borders across the Americas and Europe are generally reopen, testing requirements and lingering fears of COVID have subdued widespread international travel. Further, the lack of Chinese inbound travel remains an impediment to full recovery in many U.S. cities, particularly those on the West Coast. As these roadblocks lessen, expect urban markets to grow even further.

The return to cities is a welcome sight for the lodging industry. Record levels of dry powder on-hand, improving hotel fundamentals and renewed investor optimism all bode well for the long-term health of urban hotels.