Report: Pandemic hotel swoon to cost Minnesota governments $170 million

A glut of empty hotels rooms in Minnesota is expected to cost the state and local governments more than $170 million in tax revenue this year, according to a new report by Oxford Economics released by the American Hotel & Lodging Association (AHLA).

That estimate comes as hotel owners and operators scramble to attract guests and reopen amid an unprecedented downturn for an industry devastated by plummeting leisure and business travel across the country because of the COVID-19 pandemic.

Hotels across the state have been shuttered since early spring, and by some estimates hotels in the biggest cities have suffered the worst.

During April the average hotel occupancy rate in the central business district in Minneapolis was a bit more than 4% compared with nearly 70% at the same time last year, according to the research firm Smith Travel Research.

"You just fall off your chair when you see that figure," said Liz Rammer, president and CEO of Hospitality Minnesota.

In addition to the economic effect of the more than 70% of hotel employees who are out of work, Rammer said the decline in tax revenue will have a "devastating impact" on local governments that rely on tax dollars to fund schools, infrastructure and social service programs.

Rammer expects a slight improvement in May's numbers, with government shutdowns easing and lodging companies finding ways to protect travelers, and as leisure travel shows signs of life, particularly among families looking for close-to-home driving vacations. With so many companies still enforcing remote work rules and trying to limit their liability should an employee contract the virus while doing work-related travel, business travel is still off the table for many companies.

Across the state, the hotel sector experienced an 83% year-over-year drop in revenue per available room (RevPAR), a metric that measures hotel performance by multiplying a hotel's average daily room rate (ADR) by its occupancy rate.

Rammer said that hotel markets outside the metro experienced similar declines. Northern Minnesota posted the lowest annual drop in year-to-date occupancy, down 48%, with an early 59% decline in RevPAR.

Lost revenue in Minnesota paled in comparison to several other states, including California and Florida, which are both expected to see tax revenue decline by more than $1 billion this year. Nationwide, state and local tax revenue from hotel operations are forecast to decline by $16.8 billion, not including an estimated nearly $9 billion in property taxes that hotels pay.

As of early May, the Minnesota Management and Budget office projected a deficit of more than $2.4 billion for the current biennium, an almost $4 billion change compared with its February forecast.

Revenue is expected to be $3.611 billion lower on top of spending that is expected to be $391 million higher that forecast.

"Getting our economy back on track starts with supporting the hotel industry and helping them regain their footing," he said. "We expect it will take years before demand returns to peak 2019 levels."