Hotel Investment: an Updated Outlook
Hotels are one of the major CRE asset classes, along with multifamily, office, retail, and industrial. At EquityMultiple, we believe hotels can be a welcome addition to any investor’s portfolio, particularly for those who gravitate toward higher potential upside. And as of August 2021, JLL reports that investor sentiment has shifted, with more survey respondents expressing a renewed sense of optimism in hotel investment activity.¹ So, how can self-directed investors capitalize on what we believe to be a 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, including its continuing pandemic recovery. 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. The pandemic disrupted both of these categories. 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, the hospitality industry has already seen a strong recovery, and we believe there is reason for continued optimism. In fact, some markets are already exceeding 2019 performance.
Over the past two years, the US hospitality industry has been impacted heavily by the COVID pandemic. Performance has largely seen fluctuations negatively correlated with national COVID-19 case counts, and while of course this hurt the industry in 2020, metrics have shown upward trajectories from 2021 to present-day.² Aside from September 2021 and January 2022, when the US saw upticks in COVID cases from the Delta and Omicron variants respectively, since January 2021, occupancy has shown steady improvements.² Average daily rates surpassed 2019 levels beginning in July 2021 and mostly continued thereafter.² In tandem, these have led to RevPAR, perhaps the most significant performance metric for a hotel investment, to increase and finally exceed 2019 levels in the holiday season of 2021.²
Of course, much of this increased demand is attributed to increased travel. As of April 7th, TSA throughput is running at 90% of 2019 levels, its highest levels relative to 2019 performance since the onset of the pandemic.³ There is room to grow, and upward momentum with Omicron cases decreasing and leisure-driven Summer months impending are expected to continue to support this trend.
Corporate travel is expected to improve as employees continue to get back to the office. Leasing activity climbed to >70% of 2019 levels in Q4 2021, its highest level since the pandemic.⁴ Another leading indicator of corporate travel, Google search volume index for keywords of Corporate Brands-like Hilton, Marriott, Hyatt, and IHG Hotels- or for Amex Centurion Lounge, continue to grow and exceed 2019 levels, respectively.²
GDP and hotel demand have been known to historically have a strong correlation.⁵ Q4 2021 was the first quarter in which GDP surpassed Q4 2019’s mark.⁶ While there are, of course, some concerns related to inflation, interest rates, and geopolitical uncertainty, continued GDP growth bodes well for the performance of the industry. Broader trends related to the pandemic continue to subside, helping to stave off the key detriment to the hospitality sector over the past two years.
Market Spotlight: Miami
Expectedly, not all slices of the hotel asset class have supported the broader sector’s recovery equally. For example, upper-scale hotels continue to close in on 2019 RevPar numbers, while lower priced hotels have largely recovered fully through the latter half of 2021.² Additionally, major Southern markets like Austin, Miami, and Los Angeles have fared significantly better than Northern markets like Chicago, New York, and San Francisco.² Part of this may be attributed to increased domestic travel and travel by car to markets with warmer climates.
Even compared to its Southern counterparts, The Miami hospitality market has particularly benefited partially due to its position as a premier travel location in the US and also due to Florida’s laissez-faire covid policies. In 2021, Miami saw the greatest RevPAR in the country at $149, $30 greater than the second strongest market, Oahu.7 Miami’s monthly RevPAR has exceeded 2019 RevPar every month beginning in May 2021 aside from January 2022, with the rise of Omicron.² February 2022 then saw a strong bounceback with RevPar exceeding $200, 110% of February 2019 RevPAR.²
Part of the catalyst of Miami’s rebound comes from the reinstatement and rise of international travel. In February 2022, Miami saw 132% of its February 2019 international travel rate.² Comparatively, New York is on pace with its 2019 levels while West coast markets like LA and SF each saw less than 60% of 2019 international travel rates.² We expect the South Beach market to continue to grow post-Covid, and this combined with the trend of increased occupancy would further bolster the current record-RevPAR numbers in the market. Serving its place as one of America’s top travel destinations, the Miami hospitality market has weathered the pandemic’s effects formidably, and we believe it is poised for continued growth, potentially rewarding investors who take a stake.
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.
¹Source: JLL Global Hotels Investor Sentiment Survey (as of August 18, 2021)
²Source: CBRE Hotels Research, U.S. Hotels State of the Union (as of March 30, 2022).
³Source: TSA Travel Checkpoint Numbers (as of April 7, 2022).
⁴Source: JLL Office Outlook (as of Q4 2021).
⁵Source: 4Hoteliers (as of July 30, 2009)
⁶Source: CBRE Hotels Research, U.S. Hotels State of the Union (as of February 28, 2022)
⁷CBRE Lodging Market View (as of August 2021)
This document is for informational purposes only and is not an offer or solicitation to purchase or sell securities. Investing involves risks, including the potential for principal loss. There is no guarantee that the strategies and services will be successful or outperform other strategies and services. Certain assumptions may have been made in connection with the analysis presented herein, and changes to the assumptions may have a material impact on the analysis or results.
¹Past performance is no guarantee of future results. The investments discussed herein may be unsuitable for investors depending on their specific investment objectives and financial position. Investors should independently evaluate each investment discussed in the context of their own objectives, risk profile and circumstances.
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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