Focus in the hospitality sector is shifting from the immediacy of crisis response and protection to the prospect of hospitality opening up again. Chris Heath, a London-based partner in Dentons' global Hotels and Leisure team, takes a quick-fire look over the horizon and considers what hospitality might look like when the doors re-open and furloughed staff are back ready to serve customers. Will the crisis bring change, or is it going to be a case of business as usual?
Adaptive reuse – hospitality will fill some of the space vacated by retail's decline now seriously accelerated by COVID-19. A1 locations made available by administrations will be attractive to investors, brands and local authorities eager to keep urban centres alive. However, it may not all be one way traffic. Perhaps some hotel capacity or future projects will go the way of residential, student or other longer stay products less susceptible to transient hotel business.
Brands – there may be some shakedown and it will become clear that not all big brands are created equal. Some will weather the storm better and be in a stronger position to respond to opportunities after COVID-19. Strategy and gearing will play their roles. Expect consolidation.
Construction – competition will be keen and costs will come down.
Distress – some of this stress will become distress. Opportunities await the capital that was raised pre-pandemic. In a recovered economy, business fundamentals remain strong and those who know the sector will not be deterred by the risks highlighted by the crisis. Chinese investors, sovereign funds, private equity and family offices will eye a bargain.
Economic downturn – hospitality has been particularly badly hit by the containment closures and, when the doors re-open, consumer confidence will be at rock bottom. Recovery will only start when people feel it is safe to fly and that the hotel is a safe (virus-free) environment.
Fees and Force Majeure – HMA negotiations will become even more focused. Minimum fee arrangements are being mentioned. Force Majeure provisions will get attention like never before.
Group business – was the first to go and will be the last to come back.
Hospitality – with physical distancing expected to continue for extended periods after hospitality businesses re-open, operators are going to face a double whammy: government support ending and constrained operations throwing off sub-optimal revenue. Operators will need to rethink service delivery whilst balancing keeping people safe, limiting capacity of venues, remaining financially viable and yet continuing to provide a service that still resembles hospitality.
Independents – there will be casualties as many are not really ready for this or have the resources to weather it.
Jobs – staff will be back from furlough. Or will they? Businesses are being forced into reconsidering their operating models. With COVID-19 making the impact of Brexit worse, the war for talent will be stronger than ever. Businesses who have done right by their employees will be rewarded.
Key Money – will be hard to come by. Operators will be doing all they can to conserve cash – there may not be much left in the pot.
Loans – lenders have been under pressure to accommodate forbearance requests on covenant breaches and payment holidays, but that will not last forever and finance teams will shift from cash management to refinancing or restructuring.
Minimum fee arrangements – operators may be interested in setting a fee floor, which they need as a minimum after seeing fee streams dry up while corporate overheads remained. Owners may not be prepared to underwrite a brand's business risk.
Non-performing Loans – increased opportunities and volume in the market. There will be increased interest in loan-to-own strategies.
Operators (third party) – with the increase in franchising and third party operators in the sector, many of the smaller operators with more limited resources are going to be vulnerable.
Pandemic and Performance Insurance – owners are going to revisit business interruption insurance and see the gaps. Will brands insist on it and will cover even be available? Post 9/11, terrorism insurance was a requirement, but it was hard to come by on commercially feasible terms.
Quarantine bounce – pubs and restaurants will rebound first, with hotels following thereafter (although the experience of Wuhan raises questions of how quickly). Massed gatherings like cinema, concerts and festivals will take even longer. However, opening the doors is not the end of the problems. Take cinema, for example – the film industry will have a product gap and folk may not have an appetite for congested venues. Nevertheless, that first pint back in the pub is going to be like heaven! However, with quite differing levels of support from pub companies, not all pub landlords will see it through the restrictions to take advantage of the recovery.
Risk stack – there will inevitably be moves to rebalance the burden of risk being shared between lenders, investors, brands, operators and insurers.
Stimulus – despite significant stimulus from government, there is going to be a deep recession. Much of the initial support has focused on preferential borrowing and job protection. Hopefully, it is enough for hospitality businesses to survive but, even if they do, people will need to be encouraged to travel again. Investment in destination marketing and travel stimulus packages will be needed next.
Travel – domestic will be more important than international travel. We will want to go abroad, but just will not have the money or confidence to do it. Expect any COVID-19 incidence flare-ups to dampen demand.
Uninsured losses – there is going to be a lot of disappointment when owners look at their cover.
Values – while there are numerous variables (local economy, type of hotel and business will be key), the universal truth is that values will follow the operating fundamentals to the bottom. There will be a level of opportunistic deals, but generally transaction volume will pause for some time, further depressing valuations. Perhaps it starts to change with the other obvious "V", a Vaccine.
Working from home – businesses will be reassessing their operating models and whether their people need to travel as much or occupy as much of the real estate as they do. There will be oversupply in both office space and air travel capacity – perhaps the same for hotels?
X-axis (time) – many experts have been staring at graphs and predicting a V-shaped recovery. I am not convinced that hospitality's recovery is going to happen quite so quickly. Perhaps more hockey stick in shape with a few bumps along the way. Profound impact of a deep recession with high unemployment and significant drop in average income is going to be amplified by continued physical distancing and travel restrictions.
Year of the Rat – China may be the first to recover but 2020 will not be a good one for many in the hotel and leisure sector. Like the Rat of the Chinese zodiac, the shrewd and resourceful will flourish on the other side of this crisis. Those who focus on cash preservation, manageable debt and being ready to seize opportunities will be the winners.
Zzzzzzz – there will be no time for a lie-down in a darkened room. The whole sector is going to be very active working to make up lost ground.