Hotel Investment: an Updated Outlook
Hotels are one of the major CRE asset classes, along with multifamily, office, retail, and industrial. Hotels can be a welcome addition to any investor’s portfolio, particularly for those who gravitate toward a higher risk, higher return strategy. And as of August 2021, JLL reports that as investor sentiment has shifted, with more survey respondents expressing a renewed sense of optimism in hotel investment activity. So, how can self-directed investors capitalize on this unique market opportunity?
This article provides insight into hotel investment for investors who may not be familiar with the nuances of this asset type. We will explain how hotels are different from other commercial real estate assets, how sponsors can generate value, and a few helpful metrics to understand. We will also provide an update on the current state of the hotel real estate sector, over one year into the pandemic. Continue reading to learn more.
About Hotel Investment
While the hotel sector may seem potentially interesting at this time, remember that all hotel investments are not equal. Here’s what investors need to know prior to committing funds:
Pricing is Variable
One key difference between hotels and other CRE assets is that operators typically rent rooms out daily, rather than asking tenants to sign leases on an annual or multi-year basis. This allows the flexibility to set prices to match demand. On a holiday weekend or during a large conference, for instance, you might see a spike in the cost to book a room, whereas the same room would cost less off-season or even mid-week.
Keep in mind, of course, the price travelers are willing to pay likely also depends on the type of hotel:
- Full-service: These hotels provide numerous upscale amenities, including on-site restaurants, banquet rooms, meeting rooms, and spas. Well-known brands such as Marriott, Hilton, Hyatt, St. Regis, and Ritz-Carlton all fall under this category.
- Limited-service: Limited-service hotels offer some amenities, although not as many as you would get from a full-service hotel. You may be familiar with this experience if you’ve ever stayed at a Hampton Inn, Holiday Inn Express, or Fairfield Inn. At a minimum, guests receive access to a fitness room, pool, and small meeting spaces.
- Budget: Budget hotels like Super 8, Travelodge, and Econolodge offer few amenities, as their primary goal is to keep costs down.
- Extended stay: Designed with longer-term guests in mind, these hotels often feature suites with access to a kitchen and laundry.
Operations are Crucial
Think about the last time you traveled. Did you stay in a hotel? If so, were you satisfied with the experience?
Some hotels are extremely well-run, while others are run-down. As with other property types, you’ll want to understand the current management strategy, and any proposed changes the Sponsor would like to make. If it is a distressed asset or value-add opportunity, take a close look at the Property Improvement Plan (PIP).
Hotel Investment Metrics
To measure the performance of a hotel asset, investors need to understand two primary metrics: the Average Daily Rate (ADR), and the Revenue Per Available Room (RevPAR).
Average Daily Rate (ADR)
The Average Daily Rate is the average per-room income per period of time; in other words, the total room revenue divided by the number of rented rooms for a given period.
Revenue Per Available Room (RevPAR)
RevPAR (or “revenue per available room”) is another metric hotel investors use to measure operating performance.
To calculate RevPAR, simply take the Average Daily Rate, and multiply by the Occupancy Rate.
For example, let’s say a hotel has a total of 150 rooms, of which the average occupancy rate is 70%. The average daily rate for a room is $100 a night. The RevPAR would then be 70% of $100, or $70.
A Note on Market Volatility
Travel expenses may be the first to go when individuals—or even companies—need to tighten their budgets. Successful hotel operators understand this, and can try to adjust their pricing strategies as needed to weather economic challenges. Even in the best of times, however, competition can be tight, so it’s important to consider your personal risk tolerance prior to investing.
To put things into perspective, let’s look at the recent impact of COVID-19. Generally, demand for hotels comes from two primary travel categories: business, and leisure. This past year, both were disrupted. Corporate clients who would normally hold room blocks for extended periods of time put their plans on pause, opting to host meetings over Zoom rather than in person. On top of this, many casual travelers were not comfortable staying in hotels due to health and safety concerns.
That said, there is still hope for recovery. In fact, some markets are already demonstrating positive trends.
Q2 2021 U.S. Hotel Figures
According to CBRE, the top 10 performing markets in Q2 were all Southern resort destinations with record-high RevPAR. Saint Petersburg stands out with 22% RevPAR growth vs. Q2 2019. Its June RevPAR growth was even stronger at 35% vs. 2019. Other cities with promising RevPAR include Miami, Fort Lauderdale, Charleston, and Jacksonville.
Source: CBRE, August 2021
Note that many of these cities are primarily drive-to destinations, rather than Tier 1 cities like New York, Boston, and San Francisco.
The latest numbers from the TSA show that travel is up from this same time last year, although it has not reached 2019 levels yet. As such, urban markets, which rely on business, group, and international travel may take more time to fully recover.
While leisure travel has taken off in recent months, Deloitte notes that corporate travel will likely be slower to come back as companies navigate their return to office. Total business travel spend in the fourth quarter of 2021 is projected to reach 25%–35% of 2019 levels. By Q4 2022, however, nearly 9 in 10 respondents expect corporate travel expenditure to reach 75% or more of 2019 spend levels. Of course, much can change in the next year, and the recovery may be faster than expected. At EquityMultiple, we’re keeping our eyes on potential hotel investment opportunities in budget-friendly destinations like Pittsburgh, Kansas City, and Asheville.
The Bottom Line
We are cautiously optimistic about the hotel sector, particularly in a high-inflation environment. After all, inflation favors hotels because leases effectively turn over by the day (or every couple days) so operators don’t have NOI undercut by rising prices like you would in an office lease, or even a month-to-month apartment lease.
EquityMultiple’s Investments Team will monitor market dynamics as they continue to evolve. While COVID-19 has certainly had a large impact on performance to-date, we believe that hotels will bounce back as both leisure and business travel return to pre-pandemic levels.
If you would like to learn more about EquityMultiple’s perspective on hotel investing or any other asset class, please feel free to schedule a call with Investor Relations.
All opinions expressed herein constitute EquityMultiple’s judgement as of the date of this article and are subject to change without notice. Statements made are not facts, including statements regarding trends, market conditions and the experience or expertise of EquityMultiple, are based on current expectations, estimates, opinions and/or beliefs of EquityMultiple. Such statements are not facts and involve known and unknown risks, uncertainties and other factors. Past events and trends do not predict or guarantee or indicate future events or results.
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