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Hoteliers in summer vacation spots fear 'generational' damage from COVID-19

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A customer wearing a protective mask waits to be served at a restaurant beside a mostly empty beach Saturday, May 23, 2020, in Belmar, N.J., during the coronavirus pandemic.
Source: AP Photo

This story is part of a series looking at how the coronavirus is impacting the tourism industry and the lenders exposed to it. Read more here.

For many hotel owners in Ocean City, Md., the rhythms of the business year are as predictable as the tides: Close for the season around Thanksgiving, paying vendors and a skeleton crew over the winter on credit. Climb out of debt in the spring on advance bookings. And when the tourists start coming back after Memorial Day, make enough money in a handful of weeks to stay afloat for the whole year.

That is how it works, at least, in non-COVID-19 years. In 2020, many hotels had only reopened for a week or two in early March when they were forced to shut down again. Then customers began canceling summer bookings, and deposits — often hundreds of thousands of dollars per property — had to be returned.

With the ripple effect from a slow peak season, "I'm looking at this as a generational thing, that you basically can destroy a family's inheritance with something like this," said Mike Marshall, whose company, Marshall Hotels, manages seven hotels in the Ocean City area. "It could set you back years. And there will be lenders that get the keys handed back to them."

READ MORE: Sign up for our weekly coronavirus newsletter here, and read our latest coverage on the crisis here.

A similar pattern is playing out in summer tourism markets nationwide, including Maine, where tourism is the state's top industry.

"$6.5 billion in revenues a year, and it just stopped," Phil Kronenthal, a managing partner at Migis Hotel Group and a board member at the industry group HospitalityMaine, said in an interview. "That affects me and my family, and the families that I depend on and work with, and it impacts the guy I buy tomatoes from down the street. It impacts the guy I buy fish from, it impacts the guy I buy firewood from. It just ripples across the state."

While lodging broadly has been among the hardest-hit industries in the U.S. coronavirus pandemic, hoteliers in markets closely linked to tourism face a mixed prognosis. On one hand, the path of the virus in the coming months remains highly uncertain, and fears have grown recently about a second round of infections or a prolonged first wave. On the other, there are early signs in states easing lockdowns suggesting that Americans are eager to take trips, with relatively affordable attractions within driving distance as their favored destinations.

"If people say, 'You know what, I want to get in my car and I want to go stay in a hotel,' and they're willing to do that, they have confidence in traveling. They just don't have confidence in flying yet," said Patrick O'Neil, president of Atlanta-based Peachtree Hospitality Management, which manages hotels predominantly in the Southeast. "The major cities used to come back first. Now it's almost like, let's look at the drive markets and see where the confidence level is."

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In its peak tourism months, Worcester County, Md. — home of Ocean City — has one of the largest proportions of people employed in the food and accommodations industries, even higher than international tourist destinations like Las Vegas.

Occupancy in U.S. hotels collapsed in March, as states nationwide issued stay-at-home orders and banned mass gatherings in response to the pandemic. In the Ocean City area, hotel occupancy data from provider STR told a mixed story: It was below 30% in mid-May, well below seasonal norms, but had climbed to 62.6% by the week ended June 13, just 9.9% short of the occupancy level from a year earlier.

In the Florida Keys, for the week ended June 13, occupancy was 51.9%, down 38.2% from a year earlier, and in Branson, Mo. — a popular travel destination for group events — occupancy stood at 24.1%, down 63.5% year over year.

Each market is different, with its own seasonal patterns and demand drivers. In the Florida Keys, hoteliers were fortunate that the sharp drop-off in their business came at the end of a peak tourist season that is typically busiest in the winter, Marshall said.

In summer markets, "everybody was kind of standing in the middle of the bridge in March" when the pandemic hit, and federal rescue funding through the Paycheck Protection Program helped businesses survive but did not make up for lost advance deposits, he said.

SNL ImageLifeguards keep watch at a mostly empty beach Saturday, May 23, 2020, in Belmar, N.J., during the coronavirus pandemic.
Source: AP photo

Kronenthal said the program, administered by the Small Business Administration, was an imperfect fit for many hoteliers trying to reconcile its eight-week funding period with their uncertain reopening dates. HospitalityMaine hopes Congress will extend the program, and in the meantime is working to help members comply with its requirements and avoid accounting mistakes, he said.

"There's a huge learning curve for people who know a lot about making martinis and making beds, but who don't necessarily deal with the SBA very often," he said.

Local banks are often the busiest lenders in smaller tourist destinations, in part because they are familiar with unique market dynamics and can tailor their loans accordingly, such as with seasonal payment schedules and off-season reserve funds. Kronenthal said leaders at his company have been grateful for their relationship with their local bank and for the lender's flexibility in deferring principal and interest payments.

Marshall added, however, that forbearance requests could compound local problems if tourism does not recover quickly.

"At the end of the day, the lenders, the local banks are going to be in a pickle, and the municipalities are going to be in a pickle because they're not getting the tax money," Marshall said. "The owner of the hotel is in a pickle: He's got to decide how much cash he wants to take out of his pocket to keep the thing floating."

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As dire as the pandemic has appeared for travel in its early months, and as much uncertainty lingers — about the course of the coronavirus, the economy and civil unrest nationwide — hoteliers are clinging to some reasons for hope in the summer season. Demand for rooms in some warm-weather tourist markets like Jekyll Island, Ga., and Navarre Beach, Fla., picked up sharply in May as governors lifted stay-at-home orders in those states, Peachtree's O'Neil said.

Mat Crosswy, a principal at Stonehill Strategic Capital, Peachtree's lending affiliate, said engagement with direct marketing ads advertising Gulf of Mexico destinations rose 300% year over year around the same time, according to proprietary data.

With the potential for recovery still ahead as summer arrives in tourist markets, "it's not nearly as bad as what the rest of the industry is going to go through over the next year," he said. "I don't know when New York is going to come back. Normally the big cities, the gateways are the first ones to come back. This cycle is going to play differently. I don't think people are going to be flying and running into New York to set up meetings."

Executives at large hotel brands such as Hilton Worldwide Holdings Inc. and Hyatt Hotels Corp. have rallied around the thesis that so-called "drive-to" markets stand the best chance of a short-term recovery, compared with areas where hotels depend heavily on group and corporate travel bookings.

Even so, "It's still so early," Crosswy said. "Somebody hasn't left one of our hotels yet and caught COVID and gone home and made a PR nightmare about catching it at a hotel on the beach."

While Kronenthal, in Maine, believes his company's hotels can open in July and operate safely, he is also writing "very conservative" budget forecasts that show business off 50% to 75% for the remainder of the season.

After performance in 2018 and 2019 that was the company's best ever, "today's problems are affecting our five-year forecast," he said.

"Part of me loses sleep at night, I'll be honest with you, for a myriad of reasons that are personal and professional," he added. "I can't think of an industry more attuned and prepared to deal with adversity, but the industry will be different. I think there will be opportunities created from this, and I think that a lot of people will lose their assets and their livelihoods. One person's great loss is another person's great opportunity, unfortunately."

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