High Vacancy: Impact of COVID-19 Pandemic on the Hotel Industry

No question, the hotel industry is among the hardest hit by the coronavirus pandemic along with the airline, travel and restaurant sectors. Hotels have been closed for months and millions of employees have been laid off and furloughed. According to the American Hotel & Lodging Association, “leisure and hospitality” hotels in the U.S. are on pace to lose up to $400 million in room revenue per day based on current occupancy rates and revenue trends; as of July 8, nearly six out of 10 open hotel rooms were empty across the country. This is in addition to the thousands of hotels shuttered completely.

Recovery Projections

How long the industry will take to recover will depend on many factors including the time necessary to get the spread of the virus under control; consumer sentiment and the willingness to once again travel and stay at hotels; and operational changes based on demand such as business videoconferences in lieu of in-person meetings, conventions, and conferences.

Recent research from management consulting firm McKinsey suggests that, in the worst-case scenario, hotels could take until 2023, or even later, to return to pre-COVID-19 revenue levels.

Economy Hotels Will Fare Better More Quickly

Economy hotels are expected to have the fastest return to pre-pandemic levels, according to McKinsey, with luxury and upscale hotels to experience the slowest return. This, in part, is because economy hotels are better able to tap segments of demand that remain relatively healthy despite travel restrictions, including truck drivers and extended-stay guests. In addition, economy hotels can remain open at lower occupancy rates than other hotels. Luxury hotels, cites the report, conservatively need occupancy rates 1.5 times greater than economy hotels, and generally require more than 100 employees to operate.

In terms of business travel and hotel stays, companies indicate that they will ease travel restrictions in phases, with conferences and industry events likely to be the last to return.

The road to recovery will mean making hotels safe and conveying that safety and peace of mind to guests. (You can share our COVID-19 Safety Precautions/Recommendations for Hotels with your insureds.)

How Does the State of the Hotel Industry Impact Insurance?

The hospitality insurance market was already stressed pre-COVID-19 with increased pricing, higher attachment points, reduced capacity, and higher pricing in the Excess/Umbrella market as a result of severe catastrophic liability losses. In the wake of the pandemic and government-mandated closures, revenues have been close to nil. Additionally, many operations remained vacant with insurers requesting assurances from hotels as they reopen that they have been properly maintained. Some hotels opened their doors to the homeless and were considered habitational risks, while other hotels were used to house first responders or to quarantine patients – all resulting in a change in their risk profile which will have to be closely examined for safety and occupancy exposures as they reopen.

Communicable disease exclusions will now be found in all policies if they didn’t already exist and should be discussed with clients.

Business Interruption insurance for most hotel clients will not provide coverage as the typical policy form specifically excludes government-mandated closures due to viruses and requires physical damage to the property. This, of course, depends on the individual carriers and their policies.

As hotel revenues are much lower, many insureds have – and are – requesting lower liability limits and premium discounts. Be sure to discuss this with your clients to ensure they are properly covered as their operations slowly resume.

The road ahead for the hotel industry is undoubtedly challenging but recovery is ahead for this resilient industry just as it was in the aftermath of 9/11. We are committed to working with you and your clients to help secure solutions as we move forward together.