Boston & Cambridge Lodging Market: Coronavirus Causing Steep Demand Declines, Closures, Layoffs
As travel across the country and the world has all but stopped the last few weeks from the threat of COVID19, hotels across the country saw an unprecedented amount of cancellations. The Boston lodging market has been one the hardest hit markets in the United States with demand declining dramatically throughout most of March.
Going into the year, owners and operators were worried about increases to supply, estimated at 3.8%, but looked forward to an approximate 25% increase in convention related roomnights and four additional citywides at the city's two convention centers. Following a weak Q4 performance experienced in 2019, this year was expected to be somewhat of a correction despite the threat of new supply. In January, Pinnacle Advisory Group projected demand to increase 2.5%, its fifth consecutive year with demand growth of over 2.0%.
The Boston & Cambridge lodging market began 2020 in a good position. Accommodated roomnights in January and February increased 8.7% and 5.5%, respectively, helping to increase revenue per available room (RevPAR) 5.8% through February. March is typically the market's first month in the calendar year with high demand levels and has averaged over 80% occupancy the last ten years. Unfortunately, the market's positive performance in February is likely to be the last one like it for quite some time.
Although data for Boston and Cambridge is unavailable at this time, the declines experienced throughout the Boston MSA as reported by STR are alarming. Outside of increases on March 6 and 7 driven by an event held at the Hynes Convention Center, every day of the month has posted declines in both occupancy and ADR.
There are three primary reasons why the market has been so vulnerable to the impacts of this spreading virus in a matter of a few weeks.
- Massachusetts experienced swift spreading of COVID19 beginning March 10 and was one of the first states to declare a state of emergency, quickly disrupting businesses. There were 50 cases reported by March 10, two days later the number of cases had more than doubled and Governor Baker acted quickly requesting assistance from the federal government. On March 13, gatherings of more than 250 people were prohibited and the following day a variety of executive orders were put in place to lock down much of the State's social activity including closing schools, restaurants and bars, banning gatherings of more than 25, and restricting visitors to assisted-care facilities. By March 23, non-essential businesses in Massachusetts were ordered closed and President Trump had extended the gathering size to a limit of ten people.
- On January 31, President Trump banned all foreign nationals from entering the US if they were in China the prior two weeks. On March 11, the President banned all travel from 26 European countries. These changes to global travel had immediate impacts on markets with international airports like Boston which has grown as an international destination over the last ten years. Adding over twenty new international destinations and completing a 400,000 square foot expansion to its international terminal, Boston Logan International Airport has more than doubled its international traffic the last ten years, increasing 125% since 2010. According to the Greater Boston Convention Visitors Bureau, the market welcomed close to 3 million international visitors in 2019.
- With restrictions on meetings and gatherings in place, and the guidance on social distancing, group demand was impacted immediately. On average, 30% of the market's accommodated demand in March is made up of group-related demand, defined as rooms booked 10 or more at a time, often related to in-house events and the City's two convention centers. Plans for two citywides in early March representing over 31,000 roomnights were quickly changed; the International Antiviral Society's event at the Hynes was held virtually, the Diversified Communications Seafood Expo was postponed. To date, a growing list of events have now been cancelled or postponed through June.
Every market is impacted differently by one-off events which negatively impact travel. Historically, when demand has declined considerably due to such an event, group demand is the first segment to feel it. As such, many luxury and upper upscale hotels, the full-service hotels which rely on this segment most, experience declines in occupancy. Since group demand is booked years in advance and typically at lower rates, average daily rates (ADR) is not as impacted in the short-term. As transient demand, normally the higher rated segment, begins to decline, occupancy declines at a rapid pace, negatively impacting both occupancy and ADR. Further, in an instances such as this, where travel is being restricted from international destinations, airport markets or submarkets are often negatively impacted more so than other market types. As can be seen in the below chart, while the performance for both occupancy and ADR got progressively worse each week, declines in occupancy greatly outpaced ADR.
Many hotels in Boston are now operating with single digit occupancy, forcing operators to layoff, furlough, and reduce hours of their workforce. According to Paul Sacco, President of the Massachusetts Lodging Association, 17,847 direct hotel-related jobs and over 66,799 jobs that support hotels in Massachusetts have been cut due to the outbreak. The number of hotels in Boston and Cambridge that have made the difficult decision to close temporarily continues to grow and currently represents over 20% of the market's total rooms supply. The full-service hotels which have remained open are taking steps to trim operations to a more select-service model. Owners and operators are managing a dire situation without any indication of when it could end.
As outlined, the negative ripple effect of COVID19 has hit the Greater Boston lodging market dramatically as a result of its early spread in the State and the government's swift reaction which included restrictions to travel and meetings, and ultimately closures of businesses. The market's heavy reliance on group demand and its base of international travelers have contributed to the market's decline, one that has been more severe and immediate than the aftermath of September 11th and the financial crisis in 2008. Boston typically thrives in the spring due to an uptick in leisure travel driven by its college and universities, its citywide events, the start of Red Sox Season and the Boston Marathon, all of which will materially change in the coming weeks and months.
Based on an analysis of the impacts resulting from the September 11 terrorist attacks in 2001 and the financial crisis of 2008, two events which triggered recessions, we believe the impacts of COVID19 could be felt throughout the market for years to come. There are many unknowns at this point in time and much of the impact from COIVD19 will be related to the United States and Massachusetts government's ability to mitigate and contain the spread of the disease while simultaneously promoting a healthy economy.
