Society after Coronavirus essay #2: Hospitality and Real Estate

This is the second in a series of essays exploring the economic, social and cultural effects upon the daily lives of persons living in the United States, western Europe and more broadly around the world, as we emerge from the global Covid-19 lockdown pandemic.

 Suggested Reading Collaborate GCCT

By Matthew Parish

Of all the areas of private sector economic activity damaged by the global Coronavirus pandemic and the associated governmental lockdowns of private sector activity, the hospitality and tourism sector is arguably that which has suffered most. According to the European statistics agency Eurostat, 10% of European GDP, and 15% of the workforce, are comprised of employment and provision of goods and services in the tourism and hospitality sectors. Coronavirus and heavy government responses to it reduced these numbers to close virtually to zero. From March 2020 people stopped going on vacation throughout the world, and hotels, bars and restaurants were closed across almost every country around the globe.

As lockdown regimes are unwound (not because the epidemiology of Covid-19 has changed but because we have all belatedly realised we cannot afford keeping our economies in lockdown), tourism and hospitality are the sectors that continue to suffer the most from residual restrictive measures. Restaurants and cafes, where they are permitted to reopen, must now adhere to social distancing rules for the indefinite future. International travel remains highly restricted as of late May 2020, with questions arising as to whether the international airlines will ever be able to recover to their prior levels of activity. People remain afraid, and therefore reluctant to travel.

All this will depress the tourism and hospitality sectors. The principal consequence of social distancing is that supply of hospitality facilities will dry up. A restaurant of 100m2 floor space will be able to accommodate far fewer people per sitting if its customers and waiters are socially distanced. The net result is that prices will have to increase in the short to medium term, as much of the hospitality sector is run on competitive and hence low margins. Therefore for businesses with substantially fixed overheads, the footfall in restaurants, cafes and bars will fall. This will cause the workforce to contract by way of lay-offs, to the extent that this has not already happened as the hospitality sector closed during lockdown. Many furloughed employees will never return to work amidst the wave of subsequent redundancies that are now emerging and will surely continue, as companies realise they need far fewer workers in the industry than they used to. Across Europe, it is conceivable that millions will lose their jobs in the sector.

Government regulation of the reopened hospitality and tourism venues (social distancing) will drive prices up and occupancy rates down. Therefore eating and drinking outside of the home will become a rarer and more exclusive activity than we have recently become used to. Consumers will be short of cash, and the prices will be higher. It follows that the entire sector will shrink; although prices may go higher, that will not be compensated for by higher standards.

Government might try to mitigate these effects by providing stimulus in the form of reducing taxes; but government subsidies are not a long-term solution to malaise in the hospitality sector. The sector is going to have to shrink, and this will be enormously painful. The total quantum of government borrowing that will lie on the public sector balance sheet from subsidising the mass furlough of staff has yet to be calculated, but it will be substantial and it will need to be paid off. There will come a moment when government needs to seek repayment of its subsidies to the industry rather than keep them running at losses. Hospitality and tourism are major generators of tax receipts, traditionally existing without government subsidies.

The balancing mathematics for national treasuries in continuing to subsidise the hospitality sector indefinitely, at a time of inevitable austerity as governments seek to consolidate their debts after the massive exercises in subsidy during the lockdown period, are likely to be impossible. Nevertheless it would assist If governments would desist from excessive regulation when permitting the re-opening of the hospitality sector. There is no need for legal rules telling people how close they should or should not be from one-another; people are likely to self-aggregate according to their sense of fear and perceptions of risk.

The sense of fear prevalent amongst different sectors of the population is likely to serve as a determinant of who starts to re-utilise hospitality facilities and who does not. After the initial weeks of shock about coronavirus, it has now come to be understood that the disease’s victim profiles are predominantly the elderly and those with pre-existing potentially fatal medical conditions: in other words, people who are more susceptible to die soon anyway. Younger people, who do not anticipate dying, are therefore less afraid of the virus and more likely to congregate together and to breach social distancing rules.

There will rapidly come a point at which it becomes impossible for the government to enforce social distancing using the Police, except by keeping the hospitality sector closed indefinitely: something that will offend against people’s natural inclination to be sociable. Moreover regulating social activities in public spaces such as bars and restaurants will simply push the people who want to continue to be sociable (whose mean age is likely to go down) indoors. They will entertain one-another more at home, as is habitual anyway in some cultures such as the United States and Russia where lower population densities comparatively stretch the economics of public hospitality venues. It is in England, a country of high population density, that there is a proverbial pub on every corner.

The move indoors to socialise will follow a trend amongst young people found in recent years, but for a different reason. Across Europe, levels of alcohol and tobacco consumption have been falling consistently in recent years, as younger people have to a degree learned to socialise using information technology and away from the bottle in the public house. The reason for that change, perceived across the western world over the last decade, is open to debate. However the change may not be so much the result of amendments to regulatory nuances about bar opening hours or alcohol and tobacco taxes. People tend to drink alcohol and smoke tobacco irrespective of how much it costs or how inconvenient it is to consume it.

Instead the reason for lower alcohol and tobacco problems may be because higher levels of wealth and comfort in recent years across all levels of society, with low rates of unemployment and higher expectations of one’s work being fulfilling, have reduced anxiety levels. Alcohol sales have already been seen to have elevated significantly amidst the lockdown. People are bored and worried, and they are indoors on their own or only seeing the same small group of people repeatedly. So they drink and smoke, as a form of stress relief and as a past-time. The usual adverse public health and criminal consequences, such as a rise in rates of domestic violence, have inevitably followed. Increased alcoholism and nicotine addiction are unlikely to subside any time soon, as a wave of collective economic anxiety sweeps across nations emerging from lockdown. The poor, the unemployed and those with no prospects are inevitably anxious and will self-medicate.

The hotel industry has one advantage over restaurants and bars; hotel rooms are naturally self-isolating, and therefore running a socially distanced hotel, while government regulations enforcing social distancing continue to exist, is relatively straightforward. Nevertheless the number of tourists and travellers who wish to make use of hotel facilities at market rates will remain trifling until an initially predominantly domestic tourism industry emerges from the ashes of the Coronavirus economic meltdown.

This is in part a consequence of the near-impossibility of international travel on the part of all but the most determined, something that will ruin the 2020 summer vacation period for hotels and their customers alike. While the sense of fear of travel remains amongst substantial segments of the population, people are unlikely to move around even domestically and therefore hotels will not be engaged. Some hotels have remained open cautiously amidst the lockdown, catering for the most part at subsidised rates to government contractors such as mobile healthcare officials.

Yet the hoteliers’ business cannot be maintained on such a basis, and soon the hotels will run out of cash. Consolidation in the hotel industry is inevitable, with hotel chains merging or becoming insolvent and large numbers of redundancies following. For vastly less mobile populations, both leisure and business travel will be substantially down: business travel as commercial people have come to undertake their business affairs with others ever more remotely. Hence the same number of hotel beds will simply not be needed. It is conceivable that surplus hotel capacity will be sold off and turned into offices or residences. Having said that, because a number of people have died, the demand for residential accommodation will also be down. People have been defaulting on their mortgages and rents, and short-term rental markets such as AirBnB (the internet vacation property rentals aggregator), have dried up.

Therefore owning property will no be nearly as lucrative as it used to be. If people travel less, then they spend fewer nights a year away from their home. If the world has fewer people because several hundred thousand have died of Coronavirus, then there is less money to be made from owning property. This means that people will seek to sell excess properties that no longer make sufficient revenues to cover the expenses of maintaining them. Owners will be particularly concerned about falling into negative equity, and this fear will propel a downward spiral of property prices as everyone seeks to be the first to sell to avoid it. While the immediate future may be a good time for first time buyers, there will be fewer such first time buyers because so many people will have lost their jobs and banks will remain strict in future credit conditions given that the courts have stopped effectively operating and it remains to be seen whether banks will be able to enforce their security against owners’ mortgage defaults in the short to medium term. At some point government may have to step in to regulate the property market, to prevent its collapse. But just how to do that, in light of the world’s experiences of the 2008 property market crisis, is a vexed question.

In the meantime the fall in hotel usage, travel and rental of private accommodation, and a falling sales market may accompany a more general laying waste to town and city centres, as the demand for real estate is permanently reduced. With less travel – be it as anodyne as exotic as international travel to work (fewer conferences and in-person meetings; more use of Zoom and Skype) or travel for a vacation – there will be lower global and domestic needs for multiple real estate spaces per person. This will result in a washing-out of accommodation and constructions in places, such as town and city centres, in which people have traditionally concentrated in order to be sociable. We are on the edge of seeing an ever-increasing social atomisation.

The world is going to become ever more a place of solitary individuals and small groups going about their own restricted business, with ever fewer real (as opposed to virtual or technology-facilitated) interactions between strangers. This may be a sobering thought, for us all to reflect upon as we get drunk in our front windows waving at the person across the street via our mobile telephones. The very concept of a town or city may start to fray at the edges, as we confine ourselves, out of fear, impecuniosity or hygiene, to our places of residence. All those extraneous buildings, be they offices, hotels, bars, furnished apartments or restaurants, will not be needed anymore. Very few office workers actually need to work in an office in the modern information technology age. And very few of us need to socialise externally. We have got used to doing it at home, and we are now of diminished means so we are more likely to do it at home. The world we are soon to step into may be a lonely place.

Matthew Parish is an international lawyer and scholar of international relations based in Geneva, Switzerland. He is an Honorary Professor at the University of Leicester; was elected as a Young Global Leader of the World Economic Forum; and has been named as one of the three hundred most influential people in Switzerland. An expert in UN reform, he is the author of several books and over three hundred articles.

The views expressed in this article do not necessarily reflect those of TransConflict.

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